Average Rate of Return The following data are accumulated by McDermott Motors Inc. evaluating two competing capital investment proposals: Amount of investment Useful life Testing Equipment Diagnostic Software $300,000 $150,000 8 years 5 years $40,000 $5,000 $244,800 $85,250 Estimated residual value Estimated total income over the useful life Determine the expected average rate of return for each proposal. Testing Equipment 0.204 X % Diagnostic Software Feedback Check My Work Divide the estimated average annual income by the average investment. Initialcost plus residual value divided by two equals average investment. Net Present Value Method On Time Delivery Inc. is considering the purchase of an additional delivery truck for $85,000 on January 1, 20Y4. The truck is expected to have a five-year life with an expected residual value of $8,000 at the end of five years. The expected additional revenues from the added delivery capacity are anticipated to be $70,000 per year for each of the next five years. A driver will cost $25,000 in 20Y4, with an expected annual salary increase of $1,000 for each year thereafter. The operating costs for the truck is estimated to cost $9,000 per year. Present Value of $1 at Compound Interest Year 6% 10% 12% 15% 20% 0.943 0.9090.893 0.870 0.833 0.890 0.826 0.797 0.756 0.694 0.840 0.751 0.712 0.658 0.579 0.792 0.683 0.636 0.572 0.482 0.747 0.621 0.567 0.497 0.402 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 0.194 100.558 0.386 0.322 0.247 0.162 a. Determine the expected annual net cash flows from the delivery truck investment for 20Y4-20Y8. If required, use the minus sign to indicate an overall negative annual net cash outflow. Annual Net Cash Flow 2014 2015 $ 32,144 X $ 27,902 x $ 24,201 $ 20,972 x 2016 2017 20Y8 $ 18,157 x b. Calculate the net present value of the investment, assuming that the minimum desired rate of return is 12%. Use the table of present value of $1 provided above. Present value of annual net cash flow $123,376 x 85,000 Investment Net present value $ 38,376 x c. Which of the following statements regarding the additional truck investment is true? a. The total present value of cash flows from the delivery truck investment is less than the total purchase price of the truck. b. The total present value of cash flows from the delivery truck investment is greater than the total purchase price of the truck