United Bankshores, Inc. wishes to evaluate three capital investment proposals by
ID: 2477349 • Letter: U
Question
United Bankshores, Inc. wishes to evaluate 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. Which proposal offers the largest amount of present value per dollar of investment?
BranchOffice
Expansion Computer
System
Upgrade Install
Internet
Bill-Pay Amount to be invested $839,474 $660,165 $332,253 Annual net cash flows: Year 1 417,000 296,000 188,000 Year 2 388,000 266,000 130,000 Year 3 354,000 237,000 94,000
Explanation / Answer
1)
2) Present Value Index = 1+ (net present value / Initial investment required)
1.05
3) Branch office expenasion offers the largest amount of present value per dollar of investment.
Branch office Expansion Year Cash Flow PVF PV 0 (839,474) 1 (839,474) 1 417,000 0.909 379,053 2 388,000 0.826 320,488 3 354,000 0.751 265,854 NPV 125,921 Computer System upgrade Year Cash Flow PVF PV 0 (660,165) 1 (660,165) 1 296,000 0.909 269,064 2 266,000 0.826 219,716 3 237,000 0.751 177,987 NPV 6,602 Install Internet Bill-Pay Year Cash Flow PVF PV 0 (332,253) 1 (332,253) 1 188,000 0.909 170,892 2 130,000 0.826 107,380 3 94,000 0.751 70,594 NPV 16,613Related Questions
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