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

Question

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 $50,400 $157,000 $106,000 $251,000 2 50,400 157,000 81,000 212,000 3 50,400 157,000 40,000 149,000 4 50,400 157,000 18,000 102,000 5 50,400 157,000 7,000 71,000 Total $252,000 $785,000 $252,000 $785,000 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 $480,000. 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. 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 $ $

Explanation / Answer

Data

1a)

Warehouse

Average rate of return = Average Net Income/Average Investment

Average Net Income = 252000/5 = 50400

Average Investment = (480000+0)/2 = 240000

Average rate of return = 50400/240000

Average rate of return = 21%

Tracking Technology

Average rate of return = Average Net Income/Average Investment

Average Net Income = 252000/5 = 50400

Average Investment = (480000+0)/2 = 240000

Average rate of return = 50400/240000

Average rate of return = 21%

1b)

Warehouse

Present value of net cash flow = Year 1 Cash flow *PV(15%,1)  + Year 2 Cash flow *PV(15%,2)  + Year 3 Cash flow *PV(15%,3)  + Year 4 Cash flow *PV(15%,4)  + Year 5 Cash flow *PV(15%,5)

Present value of net cash flow = 157000*0.870 + 157000*0.756 + 157000*0.658 + 157000*0.572+ 157000*0.497

Present value of net cash flow =$ 526421

Amount to be invested = $ 480000

Net Present value =  Present value of net cash flow -  Amount to be invested

Net Present value = 526421 - 480000

Net Present value = 46421

Tracking Technology

Present value of net cash flow = Year 1 Cash flow *PV(15%,1)  + Year 2 Cash flow *PV(15%,2)  + Year 3 Cash flow *PV(15%,3)  + Year 4 Cash flow *PV(15%,4)  + Year 5 Cash flow *PV(15%,5)

Present value of net cash flow= 251000*0.870 + 212000*0.756 + 149000*0.658 + 102000*0.572+ 71000*0.497

Present value of net cash flow = 570315

Amount to be invested = $ 480000

Net Present value =  Present value of net cash flow -  Amount to be invested

Net Present value = 570315 - 480000

Net Present value = 90315

Warehouse Tracking Technology Year Income from Operations Net Cash Flow Income from Operations Net Cash Flow 1 50400 157000 106000 251000 2 50400 157000 81000 212000 3 50400 157000 40000 149000 4 50400 157000 18000 102000 5 50400 157000 7000 71000 Total 252000 785000 252000 785000

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