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: Branch Office Computer System Upgrade Install Internet Bill-Pay Expansion Amount to be invested $871,440 $563,675 $259,826 Annual net cash flows Year 1 Year 2 Year 3 399,000 371,000 339,000 275,000 248,000 220,000 164,000 113,000 82,000 Present Value of $1 at Compound Interest 1090 0.909 0.826 0.751 0.683 0.621 0.564 0.513 0.467 0.424 0.386 20% 0.833 0.694 0.579 0.482 0.402 0.335 0.279 0.233 0.194 0.162 Year 690 0.943 0.890 0.840 0.792 0.747 0.705 0.665 0.627 0.592 0.558 12% 0.893 0.797 0.712 0.636 0.567 0.507 0.452 0.404 0.361 0.322 1500 0.870 0.756 0.658 0.572 0.497 0.432 0.376 0.327 0.284 0.247 2 4 6 7 8 10

Explanation / Answer

Solution:-

(1) Net Present value Analysis:-           

Branch Office Expansion

Computer system upgrade

Install Internet Bill Pay

Present Value of Net cash Flow

(Working Note 1)

923726

620043

303996

Amount to be invested

871440

563675

259826

Net Present Value

52286

56368

44170

Working Note 1 :-

Present value of Net cash flow = PVIF @ 10% * Cash flow

                   Branch office = (399000*0.909) + (371000*0.826) + (339000*0.751) = 923726

                 Computer system Upgrade = (275000*0.909) + (248000*0.826) + (220000*0.751) = 620043

                   Install Internet = (164000*0.909) + (113000*0.826) + (82000*0.751) = 303996

(2) Present Value Index:-

Branch Office Expansion (52286/871440)

6%

Computer system upgrade (56368/563675)

10%

Install Internet Bill Pay (44170/259826)

17%

Present Value Index = NPV/Initial investment

(3) Install Internet Bill-Pay provide large amount of NPV per dollar of investment

Branch Office Expansion

Computer system upgrade

Install Internet Bill Pay

Present Value of Net cash Flow

(Working Note 1)

923726

620043

303996

Amount to be invested

871440

563675

259826

Net Present Value

52286

56368

44170

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