Question

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		$630,577		$370,912		$173,630
Annual net cash flows:
	Year 1	281,000		191,000		115,000
	Year 2	261,000		172,000		79,000
	Year 3	239,000		153,000		58,000

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 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.

	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

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.

Answer 1

Year Net present Value =TPVCF-Investment Profitability index =TPVCF/Investment Table Value Maintenance Ramp Facilities Computer Network @ 15% Cash Flows PVCF Cash Flows PVCF Cash Flows PVCF 0.870 281000 244470 191000| 166170 115000 100050 0.756 261000 197316172000 130032| 79000 59724 0.658 239000 157262 1530001 100674 58000 38164 599048 396876 197938 1 200nnl 3 Answers Ramp Maintenance Facilities Present Value of Net cashflows 599048396876 Amount to be invested 630577 370912 Net present Value -31529) 25964 Profitability Index Maintenance 0.95 Ramp Facilities 1.07 Computer Network 1.14 Computer Net work 197938 173630 24308 The Computer Networks has the largest Present Value index. Although Computer net work has the larget Net present Values, it return less Presetn valeu per dollar invested than does the Ramp Facilities as revealed by the presetn value indexes. The Presetn value index for the Maintenance Equipment is less than 1 indicates that it does not meet the minimum rate of return standard