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

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 $620,000. 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.

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.

Warehouse Tracking Technology Year Income from
Operations Net Cash
Flow Income from
Operations Net Cash
Flow 1 $46,500 $150,000 $98,000 $240,000 2 46,500 150,000 74,000 203,000 3 46,500 150,000 37,000 143,000 4 46,500 150,000 16,000 98,000 5 46,500 150,000 7,500 66,000 Total $232,500 $750,000 $232,500 $750,000

Explanation / Answer

Hi,

Please find the answer as follows:

Part A:

Average Rate of Return = Average Income/Average Initial Investment

Warehouse ARR = (46500*5)/5/620000/2 = 15%

Tracking Technology = (232500)/5/620000/2 = 15%

Part B

Thanks

Warehouse Tracking Technology Present value of net cash flow total: 502950 545220 Less amount to be invested: -620000 -620000 Net present value: -117050 -74780

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