Net Present Value Method, Present Value Index, and Analysis for a service company
Continental Railroad Company is evaluating three capital investment proposals by using the net present value method. Relevant data related to the proposals are summarized as follows:
| Maintenance Equipment |
Ramp Facilities |
Computer Network |
|||||
| Amount to be invested | $591,053 | $351,873 | $159,991 | ||||
| Annual net cash flows: | |||||||
| Year 1 | 251,000 | 171,000 | 103,000 | ||||
| Year 2 | 233,000 | 154,000 | 71,000 | ||||
| Year 3 | 213,000 | 137,000 | 52,000 |
| 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:
1. Assuming that the desired rate of return is 12%, prepare a net present value analysis for each proposal. Use the present value of $1 table above. If required, use the minus sign to indicate a negative net present value. If required, round to the nearest dollar.
| Maintenance Equipment | Ramp Facilities | Computer Network | |
| Present value of net cash flow total | $fill in the blank 1 | $fill in the blank 2 | $fill in the blank 3 |
| Amount to be invested | $fill in the blank 4 | $fill in the blank 5 | $fill in the blank 6 |
| Net present value | $fill in the blank 7 | $fill in the blank 8 | $fill in the blank 9 |
2. Determine a present value index for each proposal. If required, round your answers to two decimal places.
| Present Value Index | |
| Maintenance Equipment | fill in the blank 10 |
| Ramp Facilities | fill in the blank 11 |
| Computer Network | fill in the blank 12 |
3. The has the largest present value index. Although has the largest net present value, it returns less present value per dollar invested than does the , as revealed by the present value indexes. The present value index for the is less than 1, indicating that it does not meet the minimum rate of return standard.
Net Present Value Method, Present Value Index, and Analysis for a Service Company
Continental Railroad Company is evaluating three capital investment proposals by using the net present value method. Relevant data related to the proposals are summarized as follows:
| Maintenance Equipment | Ramp Facilities | Computer Network | |||
| Amount to be invested | $8,000,000 | $20,000,000 | $9,000,000 | ||
| Annual net cash flows: | |||||
| Year 1 | 4,000,000 | 12,000,000 | 6,000,000 | ||
| Year 2 | 3,500,000 | 10,000,000 | 5,000,000 | ||
| Year 3 | 2,500,000 | 9,000,000 | 4,000,000 |
| 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:
1. Assuming that the desired rate of return is 20%, prepare a net present value analysis for each proposal. Use the present value of $1 table above. If required, use the minus sign to indicate a negative net present value. If required, round to the nearest dollar.
| Maintenance Equipment | Ramp Facilities | Computer Network | |
| Present value of net cash flow total | $fill in the blank 1 | $fill in the blank 2 | $fill in the blank 3 |
| Less amount to be invested | $fill in the blank 4 | $fill in the blank 5 | $fill in the blank 6 |
| Net present value | $fill in the blank 7 | $fill in the blank 8 | $fill in the blank 9 |
2. Determine a present value index for each proposal. If required, round your answers to two decimal places.
| Present Value Index | |
| Maintenance Equipment | fill in the blank 10 |
| Ramp Facilities | fill in the blank 11 |
| Computer Network | fill in the blank 12 |
3. The has the largest present value index. Although has the largest net present value, it returns less present value per dollar invested than does the , as revealed by the present value indexes. The present value index for the is less than 1, indicating that it does not meet the minimum rate of return standard.
Net Present Value Method, Present Value Index, and Analysis
First United Bank Inc. is evaluating three capital investment projects using the net present value method. Relevant data related to the projects are summarized as follows:
| Branch Office Expansion |
Computer System Upgrade |
ATM Kiosk Expansion |
|||||
| Amount to be invested | $787,317 | $584,976 | $298,035 | ||||
| Annual net cash flows: | |||||||
| Year 1 | 391,000 | 278,000 | 164,000 | ||||
| Year 2 | 364,000 | 250,000 | 113,000 | ||||
| Year 3 | 332,000 | 222,000 | 82,000 |
| 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:
1. Assuming that the desired rate of return is 10%, prepare a net present value analysis for each proposal. Use the present value of $1 table above. If required, use the minus sign to indicate a negative net present value. If required, round to the nearest dollar.
| Branch Office Expansion | Computer System Upgrade | ATM Kiosk Expansion | |
| Present value of net cash flow total | $fill in the blank 1 | $fill in the blank 2 | $fill in the blank 3 |
| Amount to be invested | $fill in the blank 4 | $fill in the blank 5 | $fill in the blank 6 |
| Net present value | $fill in the blank 7 | $fill in the blank 8 | $fill in the blank 9 |
2. Determine a present value index for each proposal. If required, round your answers to two decimal places.
| Present Value Index | |
| Branch Office Expansion | fill in the blank 10 |
| Computer System Upgrade | fill in the blank 11 |
| Install Internet Bill-Pay | fill in the blank 12 |
3. Which proposal offers the largest amount of present value per dollar of investment?
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