The capital investment committee of Hopewell Company is currently considering two inve ments. The estimated income from operations and net cash flows expected from each investme are as follows: Year 1 2345. Truck Income from Operations $ 6,000 9,000 10,000 8,000 11,000 $44,000 Net Cash Flow $ 22,000 25,000 26,000 24,000 27,000 $124,000 Equipment Income from Operations $13,000 10,000 8,000 8,000 3,000 $42,000 Net Cash Flow $ 29,000 26,000 24,000 24,000 19,000 $122,000 Each investment requires $80,000. Straight-line depreciation will be used, and no residua value is expected. The committee has selected a rate of 15% for purposes of the net preser value analysis. Instructions 1. Compute the following: A. The average rate of return for each investment. B. The net present value for each investment. Use the present value of $1 table appearing in this chapter (Exhibit 2). 2. Why is the net present value of the equipment greater than the truck, even though its average rate of return is less? 3. Prepare a summary for the capital investment committee, advising it on the relative merits of the two investments.

The capital investment committee of Hopewell Company is currently considering two inve ments. The estimated income from operations and net cash flows expected from each investme are as follows: Year 1 2345. Truck Income from Operations $ 6,000 9,000 10,000 8,000 11,000 $44,000 Net Cash Flow $ 22,000 25,000 26,000 24,000 27,000 $124,000 Equipment Income from Operations $13,000 10,000 8,000 8,000 3,000 $42,000 Net Cash Flow $ 29,000 26,000 24,000 24,000 19,000 $122,000 Each investment requires $80,000. Straight-line depreciation will be used, and no residua value is expected. The committee has selected a rate of 15% for purposes of the net preser value analysis. Instructions 1. Compute the following: A. The average rate of return for each investment. B. The net present value for each investment. Use the present value of $1 table appearing in this chapter (Exhibit 2). 2. Why is the net present value of the equipment greater than the truck, even though its average rate of return is less? 3. Prepare a summary for the capital investment committee, advising it on the relative merits of the two investments.

Financial And Managerial Accounting

15th Edition

ISBN:9781337902663

Author:WARREN, Carl S.

Publisher:WARREN, Carl S.

Chapter26: Capital Investment Analysis

Section: Chapter Questions

Problem 2MAD: Assume San Lucas Corporation in MAD 26-1 assigns the following probabilities to the estimated annual...

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