Net Present Value Method, Present Value Index, and Analysis for a service compan
ID: 2542216 • Letter: N
Question
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:
Required:
1. Assuming that the desired rate of return is 15%, 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.
2. Determine a present value index for each proposal. If required, round your answers to two decimal places.
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
MaintenanceEquipment Ramp
Facilities Computer
Network Amount to be invested $706,350 $461,534 $233,498 Annual net cash flows: Year 1 318,000 229,000 149,000 Year 2 296,000 206,000 103,000 Year 3 270,000 183,000 75,000
Explanation / Answer
1.
Maintenance Equipment
Year
Cash flow
PV of $1 @ 15 %
PV
0
$ (706,350)
1
$ (706,350.00)
1
$ 318,000
0.87
$ 276,660.00
2
$ 296,000
0.756
$ 223,776.00
3
$ 270,000
0.658
$ 177,660.00
$ (28,254.00)
Ramp Facilities
Year
Cash flow
PV of $1 @ 15 %
PV
0
$ (461,534)
1
$ (461,534.00)
1
$ 229,000
0.87
$ 199,230.00
2
$ 206,000
0.756
$ 155,736.00
3
$ 183,000
0.658
$ 120,414.00
$ 13,846.00
Computer Network
Year
Cash flow
PV of $1 @ 15 %
PV
0
$ (233,498)
1
$ (233,498.00)
1
$ 149,000
0.87
$ 129,630.00
2
$ 103,000
0.756
$ 77,868.00
3
$ 75,000
0.658
$ 49,350.00
$ 23,350.00
Maintenance Equipment
Ramp Facilities
Computer Network
Present value of net cash flow total
$ 678,096
$ 475,380
$ 256,848
Amount to be invested
$ 706,350
$ 461,534
$ 233,498
Net Present value
-$ 28,254
$ 13,846
$ 23,350
2.
Maintenance Equipment
Ramp Facilities
Computer Network
Present value of net cash flow total
$ 678,096.00
$ 475,380.00
$ 256,848.00
Amount to be invested
$ 706,350.00
$ 461,534
$ 233,498
Present Value Index
$ 0.96
$ 1.03
$ 1.10
3. The Computer Network has the largest present value index. Although Ramp Facilities has the largest net present value, it returns less present value per dollar invested than does the Computer Network, as revealed by the present value indexes. The present value index for Maintenance Equipment is less than 1, indicating that it does not meet the minimum rate of return standard.
Maintenance Equipment
Year
Cash flow
PV of $1 @ 15 %
PV
0
$ (706,350)
1
$ (706,350.00)
1
$ 318,000
0.87
$ 276,660.00
2
$ 296,000
0.756
$ 223,776.00
3
$ 270,000
0.658
$ 177,660.00
$ (28,254.00)