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 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.

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 $663,421 $448,790 $236,039 Annual net cash flows: Year 1 357,000 257,000 168,000 Year 2 332,000 231,000 116,000 Year 3 303,000 206,000 84,000

Explanation / Answer

Statement showing Cash flows Branch Office Expansion Computer System Upgrade Install Internet Bill-Pay Particulars Time PVf 20% Amount PV Amount PV Amount PV Cash Outflows                        -                        1.00          (663,421.00)          (663,421.00)          (448,790.00)          (448,790.00)          (236,039.00)          (236,039.00) PV of Cash outflows = PVCO          (663,421.00)          (448,790.00)          (236,039.00) Cash inflows                    1.00                 0.8330            357,000.00            297,381.00            257,000.00            214,081.00            168,000.00            139,944.00 Cash inflows                    2.00                 0.6940            332,000.00            230,408.00            231,000.00            160,314.00            116,000.00               80,504.00 Cash inflows                    3.00                 0.5790            303,000.00            175,437.00            206,000.00            119,274.00               84,000.00               48,636.00 PV of Cash Inflows =PVCI            703,226.00            493,669.00            269,084.00 NPV= PVCI - PVCO               39,805.00               44,879.00               33,045.00 PI = PVCI/PVCO                         1.06                         1.10                         1.14 Particulars Branch Office Expansion Computer System Upgrade Install Internet Bill-Pay Present value of net cash flow total       703,226.00         493,669.00            269,084.00 Amount to be invested    (663,421.00)      (448,790.00)          (236,039.00) Net present value         39,805.00           44,879.00               33,045.00 Particulars Present Value Index Branch Office Expansion                    1.06 Computer System Upgrade                    1.10 Install Internet Bill-Pay                    1.14 Install Internet Bill-Pay offers the largest amount of present value per dollar of investment

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