Net present value method, present value index, and analysis for a service company
Present Value of $1 at Compound Interest
Required:
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
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
1, as revealed by the present value indexes. The present value index for the
does not meet the minimum rate of return standard.
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 $884,980 $531,307 $243,643 Annual net cash flows: Year 1 367,000 257,000 150,000 Year 2 341,000 231,000 103,000 Year 3 312,000 206,000 75,000
Present Value of $ at Compound Interest Year 6% 10% 12% 1.5% 20% 1 0.943 0.909 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 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 0.665 0.513 0.452 0.376 0.279 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 for each proposal. Use the present value of $1 table above. If required, use the minus sign to indicate negative present value. If required, round to the nearest dollar.
Maintenance Equipment
Ramp Facilities
Computer Network
Total present value of net cash flow
Less amount to be invested
Net present value
2. Determine a present value index for each proposal. If required, round to two decimal places.
Present Value Index
Maintenance Equipment
Ramp Facilities
Computer Network
3. The has the largest present value index. Although not meet the minimum rate of return standard.
