Question

eBook Calculator Print Item Net Present Value Method, Present Value Index, and Analysis for a service company Continental Rallroad 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 Ramp Computer Equipment Facilities Network Amount to be invested $804,847 $463,438 $242,702 Annual net cash flows: Year 1 392,000 263,000 176,000 Year 2 365,000 237,000 121,000 Year 3 333,000 210,000 88,000 Year 1 Present Value of $1 at Compound Interest 6% 10% 12% 15% 20% 0.943 0.909 0.893 0.870 0.833 0.694 0.890 0.840 0.792 0.747 0.705 0.665 0.627 9 0 .592 10 0.558 Required: 0.826 0.797 0.751 0.712 0.683 0.636 0.6210.567 0.564 0.507 0.513 0.452 0.467 0.404 0.424 0.361 0.386 0.322 0.756 0.658 0.572 0.497 0.432 0.376 0.327 0.284 0.247 0.579 0.482 0.402 0.335 0.279 0.233 0.194 0.162

Answer 1

Solution 1:

Computation of NPV
			Maintenance equipment		Ramp Facilities		Computer network
Particulars	Period	PV Factor	Amount	Present Value	Amount	Present Value	Amount	Present Value
Cash outflows:
Initial investment	0	1	$804,847.00	$804,847	$463,438.00	$463,438	$242,702.00	$242,702
Present Value of Cash outflows (A)				$804,847		$463,438		$242,702
Cash Inflows
Year 1	1	0.833	$392,000.00	$326,536	$263,000.00	$219,079	$176,000.00	$146,608
Year 2	2	0.694	$365,000.00	$253,310	$237,000.00	$164,478	$121,000.00	$83,974
Year 3	3	0.579	$333,000.00	$192,807	$210,000.00	$121,590	$88,000.00	$50,952
Present Value of Cash Inflows (B)				$772,653		$505,147		$281,534
Net Present Value (NPV) (B-A)				-$32,194		$41,709		$38,832

Solution 2:

Particulars	Initial investment	PV of cash inflows	Present Value Index
Maintenance Equipment	$804,847.00	$772,653.00	0.96
Ramp Facilities	$463,438.00	$505,147.00	1.09
Computer Network	$242,702.00	$281,534.00	1.16

Solution 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 that does the computer network as revealed by the present value indexes. The present value index for the maintenance equipment is less than 1, indicating that does not meet the minimum rate of return standard.