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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 1 2 3 4 5 Total Year 1 2 3 4 5 6 7 8 Income from Operations 9 10 $39,600 39,600 39,600 39,600 39,600 $198,000 Net Cash Flow $130,000 130,000 130,000 130,000 130,000 $650,000 Income from Operations 0.247 $83,000 63,000 32,000 14,000 6,000 $198,000 Each project requires an investment of $360,000. 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 6% 10% 12% 15% 20% 0.943 0.893 0.870 0.833 0.909 0.826 0.890 0.797 0.756 0.694 0.840 0.751 0.712 0.658 0.579 0.792 0.683 0.636 0.572 0.482 0.747 0.621 0.567 0.497 0.402 0.705 0.564 0.507 0.432 0.335 0.279 0.665 0.513 0.452 0.376 0.627 0.467 0.404 0.327 0.233 0.592 0.424 0.361 0.284 0.194 0.558 0.386 0.322 0.162 Net Cash Flow $208,000 176,000 124,000 85,000 57,000 $650,000

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 1 2 3 4 5 Total Year 1 2 3 4 5 6 7 8 Income from Operations 9 10 $39,600 39,600 39,600 39,600 39,600 $198,000 Net Cash Flow $130,000 130,000 130,000 130,000 130,000 $650,000 Income from Operations 0.247 $83,000 63,000 32,000 14,000 6,000 $198,000 Each project requires an investment of $360,000. 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 6% 10% 12% 15% 20% 0.943 0.893 0.870 0.833 0.909 0.826 0.890 0.797 0.756 0.694 0.840 0.751 0.712 0.658 0.579 0.792 0.683 0.636 0.572 0.482 0.747 0.621 0.567 0.497 0.402 0.705 0.564 0.507 0.432 0.335 0.279 0.665 0.513 0.452 0.376 0.627 0.467 0.404 0.327 0.233 0.592 0.424 0.361 0.284 0.194 0.558 0.386 0.322 0.162 Net Cash Flow $208,000 176,000 124,000 85,000 57,000 $650,000

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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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 1 2 3 4 5 Total Year 1 2 3 4 5 6 7 8 Income from Operations 9 10 $39,600 39,600 39,600 39,600 39,600 $198,000 Each project requires an investment of $360,000. 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 10% 6% 0.943 0.890 0.840 0.792 0.747 0.705 0.665 0.627 0.592 0.558 0.909 0.826 0.751 0.683 0.621 0.564 0.513 Net Cash Flow $130,000 130,000 130,000 130,000 130,000 $650,000 0.467 0.424 0.386 12% 0.893 0.797 0.712 0.636 0.567 0.507 0.452 0.404 0.361 0.322 15% 0.870 0.756 0.658 Income from Operations 0.572 0.497 0.432 0.376 0.327 0.284 0.247 $83,000 63,000 32,000 14,000 6,000 $198,000 20% 0.833 0.694 0.579 0.482 0.402 0.335 0.279 Net Cash Flow 0.233 0.194 0.162 $208,000 176,000 124,000 85,000 57,000 $650,000
Transcribed Image Text: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 1 2 3 4 5 Total Year 1 2 3 4 5 6 7 8 Income from Operations 9 10 $39,600 39,600 39,600 39,600 39,600 $198,000 Each project requires an investment of $360,000. 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 10% 6% 0.943 0.890 0.840 0.792 0.747 0.705 0.665 0.627 0.592 0.558 0.909 0.826 0.751 0.683 0.621 0.564 0.513 Net Cash Flow $130,000 130,000 130,000 130,000 130,000 $650,000 0.467 0.424 0.386 12% 0.893 0.797 0.712 0.636 0.567 0.507 0.452 0.404 0.361 0.322 15% 0.870 0.756 0.658 Income from Operations 0.572 0.497 0.432 0.376 0.327 0.284 0.247 $83,000 63,000 32,000 14,000 6,000 $198,000 20% 0.833 0.694 0.579 0.482 0.402 0.335 0.279 Net Cash Flow 0.233 0.194 0.162 $208,000 176,000 124,000 85,000 57,000 $650,000
Required: 1a. Compute the average rate of return for each investment. 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. Tracking Technology Present value of net cash flow total Less amount to be invested Net present value 2. The warehouse has al attractive. % $ Warehouse $ % net present value as tracking technology cash flows occur in time. Thus, if only one of the two projects can be accepted, the would be the more
Transcribed Image Text:Required: 1a. Compute the average rate of return for each investment. 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. Tracking Technology Present value of net cash flow total Less amount to be invested Net present value 2. The warehouse has al attractive. % $ Warehouse $ % net present value as tracking technology cash flows occur in time. Thus, if only one of the two projects can be accepted, the would be the more
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