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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: Year Warehouse Tracking Technology Income from Operations Net Cash Flow Income from Operations Net Cash Flow 1 $ 61,400 $135,000 $ 34,400 $106,000 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 he used and no residual value is expected. The committee has selected a rate of 15% for purposes of the net present value analysis. Instructions 1. Compute the following: a. The average rate of return for each investment. Round to one decimal place. b. The net present value for each investment. Use the present value of $1 table appearing in this chapter (Exhibit 2). Round present values to the nearest dollar. 2. Prepare a brief report for the capital investment committee, advising it on the relative merits of the two projects.

BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094
BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094

Solutions

Chapter
Section
Chapter 26, Problem 26.1BPR
Textbook Problem

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:

Year Warehouse Tracking Technology
Income from Operations Net Cash Flow Income from Operations Net Cash Flow
1 $ 61,400 $135,000 $ 34,400 $106,000
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 he used and no residual value is expected. The committee has selected a rate of 15% for purposes of the net present value analysis.

Instructions

 1. Compute the following:

 a. The average rate of return for each investment. Round to one decimal place.

 b. The net present value for each investment. Use the present value of $1 table appearing in this chapter (Exhibit 2). Round present values to the nearest dollar.

 2. Prepare a brief report for the capital investment committee, advising it on the relative merits of the two projects.

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Chapter 26 Solutions

Accounting
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