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 Ramp Computer Equipment Facilities Network Amount to be invested $1,068,881 $673,825 $337,950 Annual net cash flows: 443,000 Year 1 323,000 204,000 141,000 Year 2 412,000 291,000 Year 3 377,000 258,000 102,000 Present Value of $1 at Compound Interest Year 6% 10% 12% 15% 20% 0.943 0.909 0.893 0.870 0.833 1 2 0.890 0.826 0.797 0.756 0.694 3 0.840 0.751 0.712 0.658 0.579 0.792 0.683 0.636 0.572 0.482 0.402 0.747 0.621 0.567 0.497 6 0.705 0.564 0.507 0.432 0.335 0.665 0.513 0.452 0.376 0.279 7 0.627 0.467 8 0.404 0.327 0.233 0.361 0.194 9 0.592 0.424 0.284 10 0.558 0.386 0.322 0.247 0.162 Required: 1. Assuming that the desired rate of return is 10%, 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
Present value of net cash flow total	1026126	727731	378504
Amount to be invested	1068881	673825	337950
Net present value	-42755	53906	40554
2
	Present Value Index
Maintenance Equipment	0.96	=1026126/1068881
Ramp Facilities	1.08	=727731/673825
Computer Network	1.12	=378504/337950
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 than 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 it does not meet the minimum rate of return standard.
Workings:
Maintenance Equipment :
	Cash flows	PV factor	Present value
1	443000	0.909	402687
2	412000	0.826	340312
3	377000	0.751	283127
Present value of net cash flow total			1026126
Ramp Facilities :
	Cash flows	PV factor	Present value
1	323000	0.909	293607
2	291000	0.826	240366
3	258000	0.751	193758
Present value of net cash flow total			727731
Computer Network:
	Cash flows	PV factor	Present value
1	204000	0.909	185436
2	141000	0.826	116466
3	102000	0.751	76602
Present value of net cash flow total			378504