Net Present Value Method, Present Value Index, and Analysis for a Service Compan
ID: 2779137 • 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 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.
2. Determine a present value index for each proposal. If required, round your answers to two decimal places.
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 4,000,000Explanation / Answer
Present value of Net Cash Inflow:
Year
Discounting @20%
Maintenance Equipment
Ramp Facilities
Computer Network
Cash Flow
NPV
Cash Flow
NPV
Cash Flow
NPV
1
0.833
$ 4,000,000
$ 3,332,000
$ 12,000,000
$ 9,996,000
$ 6,000,000
$ 4,998,000
2
0.694
$ 3,500,000
$ 2,429,000
$ 10,000,000
$ 6,940,000
$ 5,000,000
$ 3,470,000
3
0.579
$ 2,500,000
$ 1,447,500
$ 9,000,000
$ 5,211,000
$ 4,000,000
$ 2,316,000
Total
$ 10,000,000
$ 7,208,500
$ 31,000,000
$ 22,147,000
$ 15,000,000
$ 10,784,000
Maintenance Equipment
Ramp Facilities
Computer Network
Present value of net cash flow total
$ 7,208,500
$ 22,147,000
$ 10,784,000
Less amount to be invested
$ 8,000,000
$ 20,000,000
$ 9,000,000
Net present value
$ -791,500
$ 2,147,000
$ 1,784,000
Present Value Index
Maintenance Equipment
0.90
Ramp Facilities
1.11
Computer Network
1.20
Year
Discounting @20%
Maintenance Equipment
Ramp Facilities
Computer Network
Cash Flow
NPV
Cash Flow
NPV
Cash Flow
NPV
1
0.833
$ 4,000,000
$ 3,332,000
$ 12,000,000
$ 9,996,000
$ 6,000,000
$ 4,998,000
2
0.694
$ 3,500,000
$ 2,429,000
$ 10,000,000
$ 6,940,000
$ 5,000,000
$ 3,470,000
3
0.579
$ 2,500,000
$ 1,447,500
$ 9,000,000
$ 5,211,000
$ 4,000,000
$ 2,316,000
Total
$ 10,000,000
$ 7,208,500
$ 31,000,000
$ 22,147,000
$ 15,000,000
$ 10,784,000