Mid Continent Railroad Company wishes to evaluate three capital investment propo
ID: 2347448 • Letter: M
Question
Mid Continent Railroad Company wishes to evaluate three capital investment proposals by using the net present value method. Relevant data related to the proposals are summarized as follows:
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 present above. If required, use the minus sign to indicate a negative net present value. If required, round to the nearest dollar.
2. Determine a present value index for each proposal. If required, round your answers to two decimal places.
3. Which proposal offers the largest amount of present value per dollar of investment?
SelectAcquire RailcarsNew Maintenance YardRoute Expansion
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
Explanation / Answer
1)
*New Maintenance Yard
Pv net cash flow = 6,000,000*0.833 + 4,800,000*0.694 + 4,500,000*0.579 = 10,934,700
Less amount to be invested: -12,000,000
Net present value: -1,065,300
*Route Expansion
Pv net cash flow = 12,000,000*0.833 + 11,000,000*0.694 + 9,500,000*0.579 = 23,130,500
Less amount to be invested: -20,000,000
Net present value: 3,130,500
*Acquire Railcars
Pv net cash flow = 22,000,000*0.833 + 18,500,000*0.694 + 16,000,000*0.579 = 40,429,000
Less amount to be invested: -36,000,000
Net present value: 4,429,000
2)
*PVI New Maintenance Yard = 10,934,700/12,000,000 = 0.91
*PVI Route Expansion = 23,130,500/20,000,000 = 1.16
*PVI Acquire Railcars = 40,429,000/36,000,000 = 1.12