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:

	Warehouse					Tracking Technology
Year	Income from Operations		Net Cash Flow			Income from Operations		Net Cash Flow
1	$24,000		$77,000			$50,000		$123,000
2	24,000		77,000			38,000		104,000
3	24,000		77,000			19,000		73,000
4	24,000		77,000			8,000		50,000
5	24,000		77,000			5,000		35,000
Total	$120,000		$385,000			$120,000		$385,000

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 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	0.162

Required:

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

Answer 1

1a
Average Income from Operations
Warehouse	24000
Tracking Technology	24000	=120000/5
Average investment	200000	=400000/2
	Average Rate of Return
Warehouse	12%	=24000/200000
Tracking Technology	12%	=24000/200000
1b
	Warehouse	Tracking Technology
Present value of net cash flow total	277585	296348
Less amount to be invested	200000	200000
Net present value	77585	96348
Workings:
	Warehouse			Tracking Technology
Year	Net cash flow	PV factor	Present value	Net cash flow	PV factor	Present value
1	77000	0.893	68761	123000	0.893	109839
2	77000	0.797	61369	104000	0.797	82888
3	77000	0.712	54824	73000	0.712	51976
4	77000	0.636	48972	50000	0.636	31800
5	77000	0.567	43659	35000	0.567	19845
Total			277585			296348