eBook Calculator Net Present Value Method, Present Value Index, and Analysis for
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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:
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.
2. Determine a present value index for each proposal. If required, round your answers to two decimal places.
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.
MaintenanceEquipment Ramp
Facilities Computer
Network Amount to be invested $996,044 $583,354 $311,735 Annual net cash flows: Year 1 413,000 277,000 190,000 Year 2 384,000 249,000 131,000 Year 3 351,000 222,000 95,000
Explanation / Answer
Present value of Net Cash Inflow: Year Discounting @20% Maintenance Equipment Ramp Facilities Computer Network Cash Flow NPV Cash Flow NPV Cash Flow NPV 1 0.909 413000 375417 277000 251793 190000 172710 2 0.826 384000 317184 249000 205674 131000 108206 3 0.751 351000 263601 222000 166722 95000 71345 Total 1148000 956202 748000 624189 416000 352261 1. Net Present Value Analysis: Maintenance Equipment Ramp Facilities Computer Network Present value of net cash flow total 956202 624189 352261 Less amount to be invested 996044 583354 311735 Net present value -39842 40835 40526 2. Present value Index: Present value of Cash Inflow PV of Cash Outflow Present Value Index Maintenance Equipment 956202 996044 0.96 Ramp Facilities 624189 583354 1.07 Computer Network 352261 311735 1.13
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