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Average Rate of Return Method, Net Present Value Method, and Analysis

The capital investment committee of Ellis Transport and Storage Inc. is considering two investment projects. The estimated income from operations and net cash flows from each investment are as follows:

Warehouse Tracking Technology

Year Income from Operations Net Cash Flow Income from Operations Net Cash Flow

$1$ $ $61,400$ $$135,000$ $ $34,400$ $$108,000$

$251,400125,00034,400108,000$

$336,400110,00034,400108,000$

$426,400100,00034,400108,000$

$5(3,600)70,00034,400108,000$

Total $$172,000$ $$540,000$ $$172,000$ $$540,000$

Each project requires an investment of $$368,000.$ Straight$-$line depreciation will be used, and no residual value is expected. The committee has selected a rate of $15\%$ for purposes of the net present value analysis.

Present Value of $$1$ at Compound Interest

Year $6\%10\%12\%15\%20\%$

$10\mathrm{.}9430\mathrm{.}9090\mathrm{.}8930\mathrm{.}8700\mathrm{.}833$

$20\mathrm{.}8900\mathrm{.}8260\mathrm{.}7970\mathrm{.}7560\mathrm{.}694$

$30\mathrm{.}8400\mathrm{.}7510\mathrm{.}7120\mathrm{.}6580\mathrm{.}579$

$40\mathrm{.}7920\mathrm{.}6830\mathrm{.}6360\mathrm{.}5720\mathrm{.}482$

$50\mathrm{.}7470\mathrm{.}6210\mathrm{.}5670\mathrm{.}4970\mathrm{.}402$

$60\mathrm{.}7050\mathrm{.}5640\mathrm{.}5070\mathrm{.}4320\mathrm{.}335$

$70\mathrm{.}6650\mathrm{.}5130\mathrm{.}4520\mathrm{.}3760\mathrm{.}279$

$80\mathrm{.}6270\mathrm{.}4670\mathrm{.}4040\mathrm{.}3270\mathrm{.}233$

$90\mathrm{.}5920\mathrm{.}4240\mathrm{.}3610\mathrm{.}2840\mathrm{.}194$

$100\mathrm{.}5580\mathrm{.}3860\mathrm{.}3220\mathrm{.}2470\mathrm{.}162$

Required:

$1$a$.$ Compute the average rate of return for each investment. If required, round your answer to one decimal place.

Average Rate of Return

Warehouse fill in the blank $1$

$\%$

Tracking Technology fill in the blank $2$

$\%$

$1$b$.$ Compute the net present value for each investment. Use the present value of $$1$ table above. If required, use the minus sign to indicate a negative net present value. If required, round to the nearest dollar.

Warehouse Tracking Technology

Present value of net cash flow total $fill in the blank $3$

$fill in the blank $4$

Less amount to be invested $fill in the blank $5$

$fill in the blank $6$

Net present value $fill in the blank $7$

$fill in the blank $8$

$2.$ The

net present value exceeds the selected rate established for discounted cash flows $(15\%),$ while the

does not. Thus, considering only quantitative factors, the

investment should be selected.