Check My Work Average Rate of Return Method, Net Present Value Method, and Analy
ID: 2720433 • Letter: C
Question
Check My Work
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 $600,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 12% 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.
2. The warehouse has a SelectlargersmallerItem 9 net present value because SelectlargersmallerItem 10 cash flows occur earlier in time compared to the tracking technology. Thus, if only one of the two projects can be accepted, the Selecttracking technologywarehouseItem 11 would be the more attractive.
eBook Problem-Solving StrategyAverage 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:
Warehouse Tracking Technology Year Income fromOperations Net Cash
Flow Income from
Operations Net Cash
Flow 1 $60,000 $180,000 $126,000 $288,000 2 60,000 180,000 96,000 243,000 3 60,000 180,000 48,000 171,000 4 60,000 180,000 21,000 117,000 5 60,000 180,000 9,000 81,000 Total $300,000 $900,000 $300,000 $900,000
Each project requires an investment of $600,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 12% for purposes of the net present value analysis.
Present Value of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 2 0.890 0.826 0.797 0.756 0.694 3 0.840 0.751 0.712 0.658 0.579 4 0.792 0.683 0.636 0.572 0.482 5 0.747 0.621 0.567 0.497 0.402 6 0.705 0.564 0.507 0.432 0.335 7 0.665 0.513 0.452 0.376 0.279 8 0.627 0.467 0.404 0.327 0.233 9 0.592 0.424 0.361 0.284 0.194 10 0.558 0.386 0.322 0.247 0.162Required:
1a. Compute the average rate of return for each investment. If required, round your answer to one decimal place.
Average Rate of Return Warehouse % Tracking Technology %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 Present value of net cash flow total $ $ Less amount to be invested $ $ Net present value $ $2. The warehouse has a SelectlargersmallerItem 9 net present value because SelectlargersmallerItem 10 cash flows occur earlier in time compared to the tracking technology. Thus, if only one of the two projects can be accepted, the Selecttracking technologywarehouseItem 11 would be the more attractive.
Explanation / Answer
Part ia)
1b
2.Since Tracking Technology is giving higher NPv, we should select it.
Calculation of Average Rate Warehouse: Year Income from Net Cash Total Cash Flow Operations Flow 6% PV @ 6% 20% PV @ 20% 30% PV @ 30% 1 $60,000 $180,000 $240,000 0.943 $ 226,320.00 0.833 $ 199,920.00 0.769 $ 184,615 2 60,000 180,000 $240,000 0.89 $ 213,600.00 0.694 $ 166,560.00 0.592 $ 142,012 3 60,000 180,000 $240,000 0.84 $ 201,600.00 0.579 $ 138,960.00 0.455 $ 109,240 4 60,000 180,000 $240,000 0.792 $ 190,080.00 0.482 $ 115,680.00 0.350 $ 84,031 5 60,000 180,000 $240,000 0.747 $ 179,280.00 0.402 $ 96,480.00 0.269 $ 64,639 Total $300,000 $900,000 Total $ 1,010,880.00 $ 717,600.00 $ 584,537 Less: Cash Outflow at Beginning $ 600,000.00 $ 600,000.00 $ 600,000 NPV $ 410,880.00 $ 117,600.00 $ (15,463.26) Average Rate= 6 23.13 Average Rate 29.13 Tarcking: Year Income from Net Cash Total Cash Flow Operations Flow 6% PV @ 6% 20% PV @ 20% 42% PV @ 30% 1 $126,000 $288,000 $414,000 0.943 $ 390,402.00 0.833 $ 344,862.00 0.704 $ 291,549 2 96,000 243,000 $339,000 0.89 $ 301,710.00 0.694 $ 235,266.00 0.496 $ 168,121 3 48,000 171,000 $219,000 0.84 $ 183,960.00 0.579 $ 126,801.00 0.349 $ 76,485 4 21,000 117,000 $138,000 0.792 $ 109,296.00 0.482 $ 66,516.00 0.246 $ 33,941 5 9,000 81,000 $90,000 0.747 $ 67,230.00 0.402 $ 36,180.00 0.173 $ 15,588 Total $300,000 $900,000 Total $ 1,052,598.00 $ 809,625.00 $ 585,686 Less: Cash Outflow at Beginning $ 600,000.00 $ 600,000.00 $ 600,000 NPV $ 452,598.00 $ 209,625.00 $ (14,314.35) Average Rate= 600% 34.90 Average Rate 40.90