Average Rate of Return Method, Net Present Value Method, andanalysis for a Service Company

The capital investment committee of Ellis Transport and StorageInc. is considering two investment projects. The estimatedoperating income and net cash flows from each investment are asfollows:

	Warehouse					Tracking Technology
Year	Operating Income		Net Cash Flow			Operating Income		Net Cash Flow
1	$ 61,400		$135,000			$ 34,400		$108,000
2	51,400		125,000			34,400		108,000
3	36,400		110,000			34,400		108,000
4	26,400		100,000			34,400		108,000
5	(3,600)		70,000			34,400		108,000
Total	$172,000		$540,000			$172,000		$540,000

Each project requires an investment of $368,000. Straight-linedepreciation will be used, and no residual value is expected. Thecommittee has selected a rate of 15% for purposes of the netpresent value analysis.

Present Value of $1 at CompoundInterest
Year	6%	10%	12%	15%	20%
1	0.943	0.909	0.893	0.870	0.833
2	0.890	0.826	0.797	0.756	0.694
3	0.840	0.751	0.712	0.658	0.579
4	0.792	0.683	0.636	0.572	0.482
5	0.747	0.621	0.567	0.497	0.402
6	0.705	0.564	0.507	0.432	0.335
7	0.665	0.513	0.452	0.376	0.279
8	0.627	0.467	0.404	0.327	0.233
9	0.592	0.424	0.361	0.284	0.194
10	0.558	0.386	0.322	0.247	0.162

Required:

1a. Compute the average rate of return for eachinvestment. If required, round your answers to one decimalplace.

	Average Rate of Return
Warehouse	%
Tracking Technology	%

1b. Compute the net present value for eachinvestment. 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
Total present value of net cash flow	$	$
Amount to be invested
Net present value	$	$

2. The warehouse  net present valueexceeds the selected rate established for discounted cash flows(15%), while the tracking technology  does not. Thus,considering only quantitative factors, thewarehouse  investment should be selected.