Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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

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 proposals by using the net present value method. Relevant data related to the proposals are summarized as follows:

Maintenance Equipment Ramp Facilities Computer Network
Amount to be invested $8,000,000 $20,000,000 $9,000,000
Annual net cash flows:
Year 1 4,000,000 12,000,000 6,000,000
Year 2 3,500,000 10,000,000 5,000,000
Year 3 2,500,000 9,000,000 4,000,000

Present Value of $1 at Compound Interest
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 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.

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.

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

maintenance equipmentramp facilitiescomputer network

has the largest present value index. Although

maintenance equipmentramp facilitiescomputer network

has the largest net present value, it returns less present value per dollar invested than does the

maintenance equipmentramp facilitiescomputer network

, as revealed by the present value indexes. The present value index for the

maintenance equipmentramp facilitiescomputer network

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

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Cryptocurrency 101 The Millennials Guide To Understanding And Investing In Crypto

Authors: Candide Ahouandjinou, Jamal Modica

979-8387066771

More Books

Students also viewed these Accounting questions