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 $31,200 $94,000 $66,000 $150,000 2 31,200 94,000 50,000 127,000 3 31,200 94,000 25,000 89,000 4 31,200 94,000 11,000 61,000 5 31,200 94,000 4,000 43,000 $156,000 $470,000 $156,000 $470,000 Total Each project requires an investment of $520,000. 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 $ $

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• 1492738710-Average Rate of Return Method.docx