First United Bank Inc. is evaluating three capital investment projects by using the net present value method. Relevant data related to the projects are summarized as follows:

	Branch Office Expansion		Computer System Upgrade		ATM Kiosk Expansion
Amount to be invested	$420,000		$350,000		$520,000
Annual net cash flows:
Year 1	200,000	190,000	275,000
Year 2	160,000	180,000	250,000
Year 3	160,000	170,000	250,000

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 15%, prepare a net present value analysis for each project. 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.

	Branch Office Expansion	Computer System Upgrade	ATM Kiosk Expansion
Present value of net cash flow total:	$	$	$
Amount to be invested:	$	$	$
Net present value:	$	$	$

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

	Present Value Index
Branch Office Expansion
Computer System Upgrade
ATM Kiosk Expansion

3. The computer system upgrade has the largest present value index. Although ATM kiosk expansion has the largest net present value, it returns less present value per dollar invested than does the computer system upgrade , as revealed by the present value indexes. The present value index for the branch office expansion is less than 1, indicating that it does not meet the minimum rate of return standard.

Feedback

1. For each proposal, multiply the present value factor for each year (Exhibit 2) by that year's net cash flow. Subtract the amount to be invested from the total of present value of the net cash flow.

2. Divide the total present value of the net cash flow by the amount to be invested.

3. Compare present value indexes and the net present value compared to the investment.

Learning Objective 3.