Question

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

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 $50,400 $163,000 $106,000 $261,000
2 50,400 163,000 81,000 220,000
3 50,400 163,000 40,000 155,000
4 50,400 163,000 18,000 106,000
5 50,400 163,000 7,000 73,000
Total $252,000 $815,000 $252,000 $815,000

Each project requires an investment of $560,000. 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.

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 $ $

2. The warehouse has a net present value because cash flows occur earlier in time compared to the tracking technology. Thus, if only one of the two projects can be accepted, the would be the more attractive.

Solutions

Expert Solution

Solution 1a:

Average rate of return = Average annual income / Average investment

Average investment = (Cost + Salvage value) / 2

= ($560,000 + 0) / 2 = $280,000

Average annual income:

Warehouse = $252,000 / 5 = $50,400

Tracking Technology = $252,000 / 5 = $50,400

Average rate of return:

Warehouse = $50,400 / $280,000= 18%

Tracking Technology = $50,400 / $280,000= 18%

Solution 1b:

Computation of NPV
Warehouse Tracking Technology
Particulars Period PV Factor Amount Present Value Amount Present Value
Cash outflows:
Cost of Equipment 0 1 $560,000 $560,000 $560,000 $560,000
Present Value of Cash outflows (A) $560,000 $560,000
Cash Inflows
Year 1 1 0.870 $163,000 $141,810 $261,000 $227,070
Year 2 2 0.756 $163,000 $123,228 $220,000 $166,320
Year 3 3 0.658 $163,000 $107,254 $155,000 $101,990
Year 4 4 0.572 $163,000 $93,236 $106,000 $60,632
Year 5 5 0.497 $163,000 $81,011 $73,000 $36,281
Present Value of Cash Inflows (B) $546,539 $592,293
Net Present Value (NPV) (B-A) -$13,461 $32,293

Solution 2:

Tracking technology has a higher net present value than warehouse because cash flow occur higher in initial time as compared to tracking technology. Thus if only one of the two projects can be accepted, then tracking technology will be more attractive.


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