Question

Net Present Value Method, Present Value Index, and Analysis

First United Bank Inc. is evaluating three capital investment projects using the net present value method. Relevant data related to the projects are summarized as follows:

		Branch Office Expansion		Computer System Upgrade		ATM Kiosk Expansion
Amount to be invested		$754,749		$499,898		$249,409
Annual net cash flows:
	Year 1	316,000		224,000		149,000
	Year 2	294,000		202,000		103,000
	Year 3	269,000		179,000		75,000

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 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.

	Branch Office Expansion	Computer System Upgrade	ATM Kiosk Expansion
Present value of net cash flow total	$	$	$
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
Branch Office Expansion
Computer System Upgrade
Install Internet Bill-Pay

3. Which proposal offers the largest amount of present value per dollar of investment?

Answer 1

1
	Branch Office Expansion	Computer System Upgrade	ATM Kiosk Expansion
Present value of net cash flow total	732107	504897	276844
Amount to be invested	754749	499898	249409
Net present value	-22642	4999	27435
2
	Present Value Index
Branch Office Expansion	0.97	=732107/754749
Computer System Upgrade	1.01	=504897/499898
ATM Kiosk Expansion	1.11	=276844/249409
3
ATM Kiosk Expansion offers the largest amount of present value per dollar of investment
Workings:
	Branch Office Expansion
	Cash flows	PV factor 10%	Present value
1	316000	0.909	287244
2	294000	0.826	242844
3	269000	0.751	202019
		Total	732107
	Computer System Upgrade
	Cash flows	PV factor 10%	Present value
1	224000	0.909	203616
2	202000	0.826	166852
3	179000	0.751	134429
		Total	504897
	ATM Kiosk Expansion
	Cash flows	PV factor 10%	Present value
1	149000	0.909	135441
2	103000	0.826	85078
3	75000	0.751	56325
		Total	276844