The capital investment committee of Cross Continent Trucking Inc. is considering

Question

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 $400,000. 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 from
Operations Net Cash
Flow Income from
Operations Net Cash
Flow 1 $42,000 $128,000 $88,000 $205,000 2 42,000 128,000 67,000 173,000 3 42,000 128,000 34,000 122,000 4 42,000 128,000 15,000 83,000 5 42,000 128,000 6,000 57,000 Total $210,000 $640,000 $210,000 $640,000

Explanation / Answer

(i) Average Rate of Return = Average profit/ Average investment x 100 Net profits Wherehouse Tracking technology Total Profits 210000 210000 No. of years 5 5 Average profit = 42000 42000 Average investments = Total Investment/ no of years 80000 80000 ARR 52.50% 52.50% (ii) NPV of the projects - Cash flows Pv of cash flows Years PV Factor @ 15% Wherehouse Tracking technology Wherehouse Tracking technology 1 0.869565 128000 88000 111304.3 76521.74 2 0.756144 128000 67000 96786.39 50661.63 3 0.657516 128000 122000 84162.08 80216.98 4 0.571753 128000 83000 73184.42 47455.52 5 0.497177 128000 57000 63638.62 28339.07 429075.9 283194.9 PV of Total Cash flows 429075.9 283194.9 Less: Initial Investment 400000 400000 NPV 29075.85 -116805 Please provide feedback…. Thanks in advance…. :-)

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