Average Rate of Return Method, Net Present Value Method, and Analysis The capita
ID: 2492216 • Letter: A
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 $380,000. 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 above. If required, use the minus sign to indicate a negative net present value.
Warehouse Tracking Technology Year Income fromOperations Net Cash
Flow Income from
Operations Net Cash
Flow 1 $38,000 $117,000 $80,000 $187,000 2 38,000 117,000 61,000 158,000 3 38,000 117,000 30,000 111,000 4 38,000 117,000 13,000 76,000 5 38,000 117,000 6,000 53,000 Total $190,000 $585,000 $190,000 $585,000
Explanation / Answer
1
Calculation of average rate of return for each investment:
Year
Income from operation
Warehouse
Tracking Technology
1
$ 38,000
$ 80,000
2
$ 38,000
$ 61,000
3
$ 38,000
$ 30,000
4
$ 38,000
$ 13,000
5
$ 38,000
$ 6,000
Total (A)
$ 190,000
$ 190,000
Number of years (B)
5
5
Average Annual income (C)=A/B
$ 38,000
$ 38,000
Investment (D)
$ 380,000
$ 380,000
Average rate of return = C/D
10.0%
10.0%
2
Calculation of net present value for each investment:
Warehouse:
Year
Net Cash Flow (CF)
PVF (15%)
PV = CF*PVF
1
117000
0.870
$ 101,790
2
117000
0.756
$ 88,452
3
117000
0.658
$ 76,986
4
117000
0.572
$ 66,924
5
117000
0.497
$ 58,149
Present value of net cash flow total
$ 392,301
Less: amount to be invested
$ (380,000)
Net Present Value
$ 12,301
Tracking Technology:
Year
Net Cash Flow (CF)
PVF (15%)
PV = CF*PVF
1
187000
0.870
$ 162,690
2
158000
0.756
$ 119,448
3
111000
0.658
$ 73,038
4
76000
0.572
$ 43,472
5
53000
0.497
$ 26,341
Present value of net cash flow total
$ 424,989
Less: amount to be invested
$ (380,000)
Net Present Value
$ 44,989
1
Calculation of average rate of return for each investment:
Year
Income from operation
Warehouse
Tracking Technology
1
$ 38,000
$ 80,000
2
$ 38,000
$ 61,000
3
$ 38,000
$ 30,000
4
$ 38,000
$ 13,000
5
$ 38,000
$ 6,000
Total (A)
$ 190,000
$ 190,000
Number of years (B)
5
5
Average Annual income (C)=A/B
$ 38,000
$ 38,000
Investment (D)
$ 380,000
$ 380,000
Average rate of return = C/D
10.0%
10.0%
2
Calculation of net present value for each investment:
Warehouse:
Year
Net Cash Flow (CF)
PVF (15%)
PV = CF*PVF
1
117000
0.870
$ 101,790
2
117000
0.756
$ 88,452
3
117000
0.658
$ 76,986
4
117000
0.572
$ 66,924
5
117000
0.497
$ 58,149
Present value of net cash flow total
$ 392,301
Less: amount to be invested
$ (380,000)
Net Present Value
$ 12,301
Tracking Technology:
Year
Net Cash Flow (CF)
PVF (15%)
PV = CF*PVF
1
187000
0.870
$ 162,690
2
158000
0.756
$ 119,448
3
111000
0.658
$ 73,038
4
76000
0.572
$ 43,472
5
53000
0.497
$ 26,341
Present value of net cash flow total
$ 424,989
Less: amount to be invested
$ (380,000)
Net Present Value
$ 44,989
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