pr.25 Net Present Value Method, Present Value Index, and Analysis for a service
ID: 2556682 • Letter: P
Question
pr.25
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 20%, 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 $841,093 $559,622 $284,425 Annual net cash flows: Year 1 414,000 306,000 195,000 Year 2 385,000 275,000 135,000 Year 3 352,000 245,000 98,000
Explanation / Answer
Answer 1.
Maintenance Equipment:
Amount to be invested = $841,093
Present Value of Net Cash Flows = $414,000 * PV of $1 (20%, 1) + $385,000 * PV of $1 (20%, 2) + $352,000 * PV of $1 (20%, 3)
Present Value of Net Cash Flows = $414,000 * 0.833 + $385,000 * 0.694 + $352,000 * 0.579
Present Value of Net Cash Flows = $815,860
Net Present Value = Present Value of Net Cash Flows - Amount to be invested
Net Present Value = $815,860 - $841,093
Net Present Value = -$25,233
Ramp Facilities:
Amount to be invested = $559,622
Present Value of Net Cash Flows = $306,000 * PV of $1 (20%, 1) + $275,000 * PV of $1 (20%, 2) + $245,000 * PV of $1 (20%, 3)
Present Value of Net Cash Flows = $306,000 * 0.833 + $275,000 * 0.694 + $245,000 * 0.579
Present Value of Net Cash Flows = $587,603
Net Present Value = Present Value of Net Cash Flows - Amount to be invested
Net Present Value = $587,603 - $559,622
Net Present Value = $27,981
Computer Network:
Amount to be invested = $284,425
Present Value of Net Cash Flows = $195,000 * PV of $1 (20%, 1) + $135,000 * PV of $1 (20%, 2) + $98,000 * PV of $1 (20%, 3)
Present Value of Net Cash Flows = $195,000 * 0.833 + $135,000 * 0.694 + $98,000 * 0.579
Present Value of Net Cash Flows = $312,867
Net Present Value = Present Value of Net Cash Flows - Amount to be invested
Net Present Value = $312,867 - $284,425
Net Present Value = $28,442
Answer 2.
Maintenance Equipment:
Amount to be invested = $841,093
Present Value of Net Cash Flows = $414,000 * PV of $1 (20%, 1) + $385,000 * PV of $1 (20%, 2) + $352,000 * PV of $1 (20%, 3)
Present Value of Net Cash Flows = $414,000 * 0.833 + $385,000 * 0.694 + $352,000 * 0.579
Present Value of Net Cash Flows = $815,860
Profitability Index = Present Value of Net Cash Flows / Amount to be invested
Profitability Index = $815,860 / $841,093
Profitability Index = 0.97
Ramp Facilities:
Amount to be invested = $559,622
Present Value of Net Cash Flows = $306,000 * PV of $1 (20%, 1) + $275,000 * PV of $1 (20%, 2) + $245,000 * PV of $1 (20%, 3)
Present Value of Net Cash Flows = $306,000 * 0.833 + $275,000 * 0.694 + $245,000 * 0.579
Present Value of Net Cash Flows = $587,603
Profitability Index = Present Value of Net Cash Flows / Amount to be invested
Profitability Index = $587,603 / $559,622
Profitability Index = 1.05
Computer Network:
Amount to be invested = $284,425
Present Value of Net Cash Flows = $195,000 * PV of $1 (20%, 1) + $135,000 * PV of $1 (20%, 2) + $98,000 * PV of $1 (20%, 3)
Present Value of Net Cash Flows = $195,000 * 0.833 + $135,000 * 0.694 + $98,000 * 0.579
Present Value of Net Cash Flows = $312,867
Profitability Index = Present Value of Net Cash Flows / Amount to be invested
Profitability Index = $312,867 / $284,425
Profitability Index = 1.10
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.