Net Present Value Method, Present Value Index, and Analysis for a service compan
ID: 2436254 • Letter: N
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:
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.
2. Determine a present value index for each proposal. If required, round your answers to two decimal places.
MaintenanceEquipment Ramp
Facilities Computer
Network Amount to be invested $969,464 $601,446 $280,944 Annual net cash flows: Year 1 441,000 304,000 181,000 Year 2 410,000 274,000 125,000 Year 3 375,000 243,000 91,000
Explanation / Answer
Answers
Working
Maintenance Equipment
Ramp Facilities
Computer Network
Present Value at 15%
Cash Flows
Present Values
Cash Flows
Present Values
Cash Flows
Present Values
Annual net cash flows:
Year 1
0.87
$ 441,000.00
$ 383,670.00
$ 304,000.00
$ 264,480.00
$ 181,000.00
$ 157,470.00
Year 2
0.756
$ 410,000.00
$ 309,960.00
$ 274,000.00
$ 207,144.00
$ 125,000.00
$ 94,500.00
Year 3
0.658
$ 375,000.00
$ 246,750.00
$ 243,000.00
$ 159,894.00
$ 91,000.00
$ 59,878.00
TOTAL
$ 1,226,000.00
$ 940,380.00
$ 821,000.00
$ 631,518.00
$ 397,000.00
$ 311,848.00
Answer
Maintenance Equipment
Ramp Facilities
Computer Network
Present value of net cash flow total
$ 940,380.00
$ 631,518.00
$ 311,848.00
Amount to be invested
$ (969,464.00)
$ (601,446.00)
$ (280,944.00)
Net present value
$ (29,084.00)
$ 30,072.00
$ 30,904.00
Working
Maintenance Equipment
Ramp Facilities
Computer Network
A
Net present value
$ (29,084.00)
$ 30,072.00
$ 30,904.00
B
Amount to be invested
$ 969,464.00
$ 601,446.00
$ 280,944.00
C=A / B
Present Value Index
(0.03)
0.05
0.11
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.
Maintenance Equipment
Ramp Facilities
Computer Network
Present Value at 15%
Cash Flows
Present Values
Cash Flows
Present Values
Cash Flows
Present Values
Annual net cash flows:
Year 1
0.87
$ 441,000.00
$ 383,670.00
$ 304,000.00
$ 264,480.00
$ 181,000.00
$ 157,470.00
Year 2
0.756
$ 410,000.00
$ 309,960.00
$ 274,000.00
$ 207,144.00
$ 125,000.00
$ 94,500.00
Year 3
0.658
$ 375,000.00
$ 246,750.00
$ 243,000.00
$ 159,894.00
$ 91,000.00
$ 59,878.00
TOTAL
$ 1,226,000.00
$ 940,380.00
$ 821,000.00
$ 631,518.00
$ 397,000.00
$ 311,848.00
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