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eBook Question Content Area Net present value method, present value index, and analysis for a service company Continental Railroad Company is evaluating three capital investment

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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:

Line Item Description Maintenance Equipment Ramp Facilities Computer Network
Amount to be invested $893,400 $564,372 $277,799
Annual net cash flows:
Year 1 395,000 277,000 170,000
Year 2 367,000 249,000 117,000
Year 3 336,000 222,000 85,000

Year 6% 10% 12% 15% 20%
1 0.943 0.909 0.893 0.870 0.833
2 0.890 0.826 0.797 0.756 0.694
3 0.840 0.751 0.712 0.658 0.579
4 0.792 0.683 0.636 0.572 0.482
5 0.747 0.621 0.567 0.497 0.402
6 0.705 0.564 0.507 0.432 0.335
7 0.665 0.513 0.452 0.376 0.279
8 0.627 0.467 0.404 0.327 0.233
9 0.592 0.424 0.361 0.284 0.194
10 0.558 0.386 0.322 0.247 0.162

Required:

1. Assuming that the desired rate of return is 12%, 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.

Line Item Description Maintenance Equipment Ramp Facilities Computer Network
Total present value of net cash flow $fill in the blank 1 $fill in the blank 2 $fill in the blank 3
Less amount to be invested fill in the blank 4 fill in the blank 5 fill in the blank 6
Net present value $fill in the blank 7 $fill in the blank 8 $fill in the blank 9

2. Determine a present value index for each proposal. If required, round your answers to two decimal places.

Line Item Description Present Value Index
Maintenance Equipment fill in the blank 10
Ramp Facilities fill in the blank 11
Computer Network fill in the blank 12

3. The fill in the blank 1 of 4

maintenance equipmentramp facilitiescomputer networkcomputer network

has the largest present value index. Although fill in the blank 2 of 4

maintenance equipmentramp facilitiescomputer networkramp facilities

has the largest net present value, it returns less present value per dollar invested than does the fill in the blank 3 of 4

maintenance equipmentramp facilitiescomputer networkcomputer network

, as revealed by the present value indexes. The present value index for the fill in the blank 4 of 4

maintenance equipmentramp facilitiescomputer networkmaintenance equipment

is less than 1, indicating that it does not meet the minimum rate of return standard.

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