Net Present Value Method, Present Value Index, and Analysis United Bankshores, I

Question

Net Present Value Method, Present Value Index, and Analysis

United Bankshores, Inc. 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 6%, 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. Which proposal offers the largest amount of present value per dollar of investment?

Branch
Office
Expansion Computer
System
Upgrade Install
Internet
Bill-Pay Amount to be invested $557,487 $430,574 $229,014 Annual net cash flows: Year 1 265,000 180,000 125,000 Year 2 246,000 162,000 86,000 Year 3 225,000 144,000 63,000

Explanation / Answer

Branch Office Expansion Computer System Upgrade Install Internet Bill-Pay Present value of net cash flow total 657835 434880 247335 Amount to be invested 557487 430574 229014 Net present value 100348 4306 18321 2 Present Value Index Branch Office Expansion 1.18 =657835/557487 Computer System Upgrade 1.01 =434880/430574 Install Internet Bill-Pay 1.08 =247335/229014 3 Branch Office Expansion offers the largest amount of present value per dollar of investment

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