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:

		Maintenance Equipment		Ramp Facilities		Computer Network
Amount to be invested		$568,602		$336,893		$171,869
Annual net cash flows:
	Year 1	277,000		186,000		119,000
	Year 2	258,000		167,000		82,000
	Year 3	235,000		149,000		60,000

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

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.

	Maintenance Equipment	Ramp Facilities	Computer Network
Total present value of net cash flow	$	$	$
Amount to be invested
Net present value	$	$	$

2. Determine a present value index for each proposal. If required, round your answers to two decimal places.

	Present Value Index
Maintenance Equipment
Ramp Facilities
Computer Network

Answer 1

1
	Maintenance Equipment	Ramp Facilities	Computer Network
Total present value of net cash flow	545858	357107	190775
Amount to be invested	568602	336893	171869
Net present value	-22744	20214	18906
2
	Present Value Index
Maintenance Equipment	0.96	=545858/568602
Ramp Facilities	1.06	=357107/336893
Computer Network	1.11	=190775/171869
Workings:
Maintenance Equipment:
Year	PV factor	Cash flows	Present value
1	0.833	277000	230741
2	0.694	258000	179052
3	0.579	235000	136065
		Total	545858
Ramp Facilities :
Year	PV factor	Cash flows	Present value
1	0.833	186000	154938
2	0.694	167000	115898
3	0.579	149000	86271
		Total	357107
Computer Network:
Year	PV factor	Cash flows	Present value
1	0.833	119000	99127
2	0.694	82000	56908
3	0.579	60000	34740
		Total	190775