Question Average Rate of Return Method, Net Present Value Method, andAnalysis The capital investment committee of Cross Continent TruckingInc. is considering two capital investments. The estimated incomefrom operations and net cash flows from each investment are asfollows: Warehouse TrackingTechnology Year Incomefrom Operations Net Cash Flow Incomefrom 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 Each project requires an investment of $380,000. Straight-linedepreciation will be used, and no residual value is expected. Thecommittee has selected a rate of 15% for purposes of the netpresent value analysis. Present Valueof $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 eachinvestment. If required, round your answer to one decimalplace. Average Rate ofReturn Warehouse % Tracking Technology % 1b. Compute the net present value for eachinvestment. Use the present value of $1 table above. If required,use the minus sign to indicate a negative net present value. Warehouse TrackingTechnology Present value of net cash flowtotal $ $ Less amount to be invested $ $ Net present value $ $
Question
Average Rate of Return Method, Net Present Value Method, andAnalysis
The capital investment committee of Cross Continent TruckingInc. is considering two capital investments. The estimated incomefrom operations and net cash flows from each investment are asfollows:
|
|
Warehouse |
|
TrackingTechnology |
|||||||
|
Year |
Incomefrom Operations |
Net Cash Flow |
|
Incomefrom 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 |
|
|
Each project requires an investment of $380,000. Straight-linedepreciation will be used, and no residual value is expected. Thecommittee has selected a rate of 15% for purposes of the netpresent value analysis.
|
Present Valueof $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 eachinvestment. If required, round your answer to one decimalplace.
|
|
Average Rate ofReturn |
|
Warehouse |
% |
|
Tracking Technology |
% |
1b. Compute the net present value for eachinvestment. Use the present value of $1 table above. If required,use the minus sign to indicate a negative net present value.
|
|
Warehouse |
TrackingTechnology |
|
Present value of net cash flowtotal |
$ |
$ |
|
Less amount to be invested |
$ |
$ |
|
Net present value |
$ |
$ |
Capital budgeting is a planning mechanism that is used to determine if long-term investments are profitable for the company and will generate the expected returns in the future years. Three major techniques of capital budgeting are; Net Present Value Method, ARR, and throughput analysis.
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