Average Rate of Return Method, Net Preet Vale ethod, and Analysis The capital in

Question

Average Rate of Return Method, Net Preet Vale ethod, 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 Net Cash Flow Income from Income from Operations Net Cash Flow Year Operations 539,000 39,000 39,000 39,000 39,000 $195,000 $122,000 122,000 122,000 122,000 122,000 $610,000 $82,000 62,000 31,000 14,000 6,000 $195,000 $195,000 165,000 116,000 79,000 55,000 $610,000 4 Total

Explanation / Answer

1a. Average rate of return = Average Income from Operations / Average Investment

1.b.

Present Value of Net Cash Flows :

Warehouse : $ 122,000 x ( 0.893 + 0.797 + 0.712 + 0.636 + 0.567) = $ 439,810

Tracking Technology : $ 195,000 x 0.893 + $ 165,000 x 0.797 + $ 116,000 x 0.712 + $ 79,000 x 0.636 + $ 55,000 x 0.567 = $ ( 174,135 + 131,505 + 82,592 + 50,244 + 31,185) = $ 469,661.

2. The warehouse has a lower net present value because smaller cash flows occur earlier in time compared to tracking technology. Thus, if only one of the two projects can be accepted, the tracking technology would be more attractive.

Average Rate of Return Warehouse 13 % Tracking Technology 13 %

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