Average Rate of Return Method, Net Present Value Method, and Analysis The capital investment committee of Cross
Question:
Average Rate of Return Method, Net Present Value Method, and Analysis
The capital investment committee of Cross Continent Trucking Inc. is considering two capital investments. 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 | $45,000 | $146,000 | $95,000 | $234,000 | ||||||
| 2 | 45,000 | 146,000 | 72,000 | 197,000 | ||||||
| 3 | 45,000 | 146,000 | 36,000 | 139,000 | ||||||
| 4 | 45,000 | 146,000 | 16,000 | 95,000 | ||||||
| 5 | 45,000 | 146,000 | 6,000 | 65,000 | ||||||
| Total | $225,000 | $730,000 | $225,000 | $730,000 | ||||||
Each project requires an investment of $600,000. 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.
| 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.
| Warehouse | Tracking Technology | |
| Present value of net cash flow total | $ | $ |
| Less amount to be invested | $ | $ |
| Net present value | $ | $ |
2. The warehouse has a net present value because cash flows occur earlier in time compared to the tracking technology. Thus, if only one of the two projects can be accepted, the would be the more attractive.
Expert Answer:
Average Rate of Return Method Net Present Value Method and Analysis The capital investment committee of Cross Continent Trucking Inc is considering two capital investments The estimated income from op... View the full answer
