The capital investment committee of Cross Continent Trucking Inc. is considering

Question

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:

Each project requires an investment of $420,000. 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.

Required:

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

1b. Compute the net present value for each investment. Use the present value of $1 table present above.

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

Warehouse Tracking Technology Year Income from
Operations Net Cash
Flow Income from
Operations Net Cash
Flow 1 $39,900 $121,000 $84,000 $194,000 2 39,900 121,000 64,000 163,000 3 39,900 121,000 32,000 115,000 4 39,900 121,000 14,000 79,000 5 39,900 121,000 5,500 54,000 Total $199,500 $605,000 $199,500 $605,000

Explanation / Answer

1 0.943 0.909 0.893 0.870 0.833

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