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:
Line Item Description | Maintenance Equipment | Ramp Facilities | Computer Network |
---|---|---|---|
Amount to be invested | $809,639 | $485,936 | $263,556 |
Annual net cash flows: | |||
Year 1 | 358,000 | 243,000 | 161,000 |
Year 2 | 333,000 | 219,000 | 111,000 |
Year 3 | 304,000 | 194,000 | 81,000 |
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.
Line Item Description | 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.
Line Item Description | 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 fill in the blank 1 of 4
maintenance equipmentramp facilitiescomputer network
has the largest present value index. Although fill in the blank 2 of 4
maintenance equipmentramp facilitiescomputer network
has the largest net present value, it returns less present value per dollar invested than does the fill in the blank 3 of 4
maintenance equipmentramp facilitiescomputer network
, as revealed by the present value indexes. The present value index for the fill in the blank 4 of 4
maintenance equipmentramp facilitiescomputer network
is less than 1, indicating that it does not meet the minimum rate of return standard.
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