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

The capital investment committee of Cross Continent Trucking 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	$36,100				$118,000					$76,000				$189,000
2	36,100				118,000					58,000				159,000
3	36,100				118,000					29,000				112,000
4	36,100				118,000					13,000				77,000
5	36,100				118,000					4,500				53,000
Total	$180,500				$590,000					$180,500				$590,000

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

Each project requires an investment of $380,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 12% for purposes of the net present value analysis.

Instructions:

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

	Average Annual Rate of Return
Warehouse	_________________ %
Tracking Technology	_________________ %

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

	Warehouse		Tracking Technology
Present value of net cash flow total	$ _________________		$ _________________
Amount to be invested	_________________		_________________
Net present value	$ _________________		$ _________________