Chapter 11 Capital Investment Analysis Problem Che capital investment committee of Hopewell Company is currently considering two invest ments. The estimated income from operations and net cash flows expected from each investmen are as follows: Truck Equipment Income from Year Operations Net Cash Flow Income from Net Cash Operations Flow 1 $ 6,000 $ 22,000 $13,000 $ 29,000 2345 9,000 25,000 10,000 26,000 10,000 26,000 8,000 24,000 8,000 24,000 8,000 24,000 11,000 27,000 3,000 19,000 $44,000 $124,000 $42,000 $122,000 Each investment requires $80,000. 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. 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. Need more practice? Find additional multiple-choice questions, exercises, and problems in CengageNOWv2. Multiple-Choice Questions 1. C Methods of evalua include the average (answer B). 2. B The average rate of re capital investment proposals of return method (answ ignore the time value of money and the cash payback method 24% (answ determined by dividing the expected