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 capital investments. The estimated income from operations and net cash flows from each investment are as follows:

Each project requires an investment of $360,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 10% 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 above. If required, use the minus sign to indicate a negative net present value.

Warehouse Tracking Technology Year Income from
Operations Net Cash
Flow Income from
Operations Net Cash
Flow 1 $30,600 $97,000 $64,000 $155,000 2 30,600 97,000 49,000 131,000 3 30,600 97,000 24,000 92,000 4 30,600 97,000 11,000 63,000 5 30,600 97,000 5,000 44,000 Total $153,000 $485,000 $153,000 $485,000

Explanation / Answer

Answer:

1

Average rate of return

= Average Income/Average Investment*100

Now we will find out Average rate of return for both as under

Warehouse

= Average Income/Average Investment*100

= (153000/5)/(360000/2)*100

= 17%

Tracking Technology

= Average Income/Average Investment*100

= (153000/5)/(360000/2)*100

= 17%

_______________________________________________

Part B:

Warehouse

Year

Cash
flow

Pv
factor
at 10%

Prasen
value

A

B

C=A*B

1

97000

0.909

88173

2

97000

0.826

80122

3

97000

0.751

72847

4

97000

0.683

66251

5

97000

0.621

60237

367630

Tracking Technology

Year

Cash
flow

Pv
factor
at 10%

Prasen
value

A

B

C=A*B

1

$155,000

0.909

140895

2

$131,000

0.826

108206

3

$92,000

0.751

69092

4

$63,000

0.683

43029

5

$44,000

0.621

27324

388546

Warehouse

Tracking Technology

Present value of net cash flow total

367630

388546

Less amount to be invested

-360000

-360000

Net present value

7630

28546

Warehouse

Year

Cash
flow

Pv
factor
at 10%

Prasen
value

A

B

C=A*B

1

97000

0.909

88173

2

97000

0.826

80122

3

97000

0.751

72847

4

97000

0.683

66251

5

97000

0.621

60237

367630

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