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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, 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 $790,094 $502,546 $230,001
Annual net cash flows:
Year 1 385,000 285,000 158,000
Year 2 358,000 257,000 109,000
Year 3 327,000 228,000 79,000

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 $ $ $
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 has the largest present value index. Although has the largest net present value, it returns less present value per dollar invested than does the , as revealed by the present value indexes. The present value index for the is less than 1, indicating that it does not meet the minimum rate of return standard.

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