United Bankshores, Inc. wishes to evaluate three capital investment proposals by
ID: 2561007 • 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 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?
Install Internet Bill-Pay or Branch Office Expansion or Computer System Upgrade
BranchOffice
Expansion Computer
System
Upgrade Install
Internet
Bill-Pay Amount to be invested $962,400 $541,041 $276,660 Annual net cash flows: Year 1 438,000 302,000 188,000 Year 2 407,000 272,000 130,000 Year 3 372,000 242,000 94,000
Explanation / Answer
1) Branch Computer Install Office System Internet PV @15% Expansion PV*Cash flow Upgrade PV*Cash flow Bill-Pay PV*Cash flow Amount to be invested 1 $ -9,62,400 $ -9,62,400 $ -5,41,041 $ -5,41,041 $ -2,76,660 $ -2,76,660 Annual net cash flows: Year 1 0.87 $ 4,38,000 $ 3,81,060 $ 3,02,000 $ 2,62,740 $ 1,88,000 $ 1,63,560 Year 2 0.756 $ 4,07,000 $ 3,07,692 $ 2,72,000 $ 2,05,632 $ 1,30,000 $ 98,280 Year 3 0.658 $ 3,72,000 $ 2,44,776 $ 2,42,000 $ 1,59,236 $ 94,000 $ 61,852 NPV $ -28,872 $ 86,567 $ 47,032 Branch Office Expansion Computer System Upgrade Install Internet Bill-Pay Present value of net cash flow total (a) $ 9,33,528 $ 6,27,608 $ 3,23,692 Amount to be invested (b) $ -9,62,400 $ -5,41,041 $ -2,76,660 Net present value (a-b) $ -28,872 $ 86,567 $ 47,032 2) Present value index = Present value of cash Inflow/present value of cash out flow present value index a/b = 0.97 1.16 1.17 3) Computer System Upgrade proposal offers the largest amount of present value per dollar of investment of $86,567.
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