Question
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, 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:
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| Maintenance Equipment |
| Ramp Facilities |
| Computer Network |
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Amount to be invested |
| $988,689 |
| $604,000 |
| $296,519 |
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Annual net cash flows: |
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| Year 1 | 386,000 |
| 270,000 |
| 174,000 |
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| Year 2 | 359,000 |
| 243,000 |
| 120,000 |
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| Year 3 | 328,000 |
| 216,000 |
| 87,000 |
Required: 1. Assuming that the desired rate of return is 6%, 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.
Ch 26 #4
Net Present Value Method, Internal Rate of Return Method, and Analysis for a Service Company The management of Advanced Alternative Power Inc. is considering two capital investment projects. The estimated net cash flows from each project are as follows:
The wind turbines require an investment of $1,214,800, while the biofuel equipment requires an investment of $2,169,800. No residual value is expected from either project.
Required: 1a. Compute the net present value for each project. Use a rate of 10% and the present value of an annuity of $1 in the table above. If required, use the minus sign to indicate a negative net present value. If required, round to the nearest whole dollar.
1b. Compute a present value index for each project. If required, round your answers to two decimal places.
2. Determine the internal rate of return for each project by (a) computing a present value factor for an annuity of $1 and (b) using the present value of an annuity of $1 in the table above. If required, round your present value factor answers to three decimal places and internal rate of return to the nearest whole percent. |
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