United Bankshores, Inc. wishes to evaluate three capital investment proposals by

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 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.

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

Branch
Office
Expansion Computer
System
Upgrade Install
Internet
Bill-Pay Amount to be invested $622,939 $462,904 $229,337 Annual net cash flows: Year 1 336,000 245,000 148,000 Year 2 312,000 221,000 102,000 Year 3 286,000 196,000 74,000

Explanation / Answer

Working Note:1

Net Present value

Branch Office Expansion

Amount

Branch Office Expansion

(Present Value=Amount*

Present value Factor)

Computer System Upgrade

Amount

Computer System Upgrade

(Present Value=Amount*

Present value Factor)

Install Internet Bill-Pay

Amount

Install Internet Bill-Pay

(Present Value=Amount*

Present value Factor)

Present value Index=Present value of Project cashflow/Initial Investment

Branch Office Expansion=716,380/662,939=1.08

Computer System Upgrade=509,194/462,904=1.10

Install Internet Bill-Pay=254,564/229,337=1.11

3.In terms of per dollar of investment,Install Internet bill-Pay proposal needs to be accepted since its is giveing $1.11 per $1 investemnt.

Net Present value of the project(in $) Partculars Branch office expansion Computer system upgrade Install internet bill Pay Present value of net cash flow total(Working note 1) 716,380 509,194 254,564 Amount to be invested 662,939 462,904 229,337 Net present value of the Project 53,441 46,290 25,227

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