Average Rate of Return Method, Net Present Value Method, and analysis for a Service Company
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
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-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%
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 each investment. If required, round your answer to one decimal
place.
Average Rate of Return
Warehouse %
Tracking Technology %
1b. 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.
2. PR.11-02B
Warehouse Tracking Technology
Present value of net cash flow total $ $
Amount to be invested $ $
Net present value $ $
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.