Question
Net Present Value Method, An index computed by dividing the total present value of the net cash flow to be received from a proposed capital
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Net Present Value Method, An index computed by dividing the total present value of the net cash flow to be received from a proposed capital investment by the amount to be invested.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 $933,545 $556,137 $297,945 Annual net cash flows: Year 1 396,000 273,000 182,000 Year 2 368,000 246,000 126,000 Year 3 337,000 218,000 91,000
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 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.
Maintenance Equipment Ramp Facilities Computer Network Total present value of net cash flow $ $ $ Amount to be invested Net present value $ $ $
2. Determine a present value index for each proposal. If required, round your answers to two decimal places.
Present Value Index Maintenance Equipment Ramp Facilities Computer Network
3. The
- maintenance equipment
- ramp facilities
- computer network
has the largest present value index. Although - maintenance equipment
- ramp facilities
- computer network
has the largest net present value, it returns less present value per dollar invested than does the - maintenance equipment
- ramp facilities
- computer network
, as revealed by the present value indexes. The present value index for the - maintenance equipment
- ramp facilities
- computer network
is less than 1, indicating that it does not meet the minimum rate of return standard.
Net Present Value Method, An index computed by dividing the total present value of the net cash flow to be received from a proposed capital investment by the amount to be invested.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 | $933,545 | $556,137 | $297,945 | ||||
Annual net cash flows: | |||||||
Year 1 | 396,000 | 273,000 | 182,000 | ||||
Year 2 | 368,000 | 246,000 | 126,000 | ||||
Year 3 | 337,000 | 218,000 | 91,000 |
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 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.
Maintenance Equipment | Ramp Facilities | Computer Network | |
Total present value of net cash flow | $ | $ | $ |
Amount to be invested | |||
Net present value | $ | $ | $ |
2. Determine a present value index for each proposal. If required, round your answers to two decimal places.
Present Value Index | |
Maintenance Equipment | |
Ramp Facilities | |
Computer Network |
3. The
- maintenance equipment
- ramp facilities
- computer network
- maintenance equipment
- ramp facilities
- computer network
- maintenance equipment
- ramp facilities
- computer network
- maintenance equipment
- ramp facilities
- computer network
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