Question

Net Present Value Method, Present Value Index, and Analysis

United Bankshores, Inc. wishes to evaluate three capital investment proposals by using the net present value method. Relevant data related to the proposals are summarized as follows:

		Branch Office Expansion		Computer System Upgrade		Install Internet Bill-Pay
Amount to be invested		$575,292		$377,600		$191,050
Annual net cash flows:
	Year 1	286,000		200,000		123,000
	Year 2	266,000		180,000		85,000
	Year 3	243,000		160,000		62,000

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 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.

	Branch Office Expansion	Computer System Upgrade	Install Internet Bill-Pay
Present value of net cash flow total	$	$	$
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
Branch Office Expansion
Computer System Upgrade
Install Internet Bill-Pay

3. Which proposal offers the largest amount of present value per dollar of investment?

Answer 1

Answer-1)-

Calculation of Net Present Value
		Branch Office Expansion		Computer System Upgrade		Install Internet Bill-Pay
Year	Discount Factor (a)	Cash Inflow (b)	Present value (c=a*b)	Cash Inflow (d)	Present value (e=a*d)	Cash Inflow (f)	Present value (g=a*f)
		$	$	$	$	$	$
1	0.870	286000	248820	200000	174000	123000	107010
2	0.756	266000	201133	180000	136105	85000	64272
3	0.658	243000	159777	160000	105203	62000	40766
	TOTAL		609731		415308		212048
	Capital Investment		575292		377600		191050
	Net Present value		34439		37708		20998

2)-

Calculation of Project Profitability Index
Particulars	Project Number
	Branch Office Expansion	Computer System Upgrade	Install Internet Bill-Pay
Net Present Value $ (A)	34439	37708	20998
Investment required $ (B)	575292	377600	191050
Profitability Index C=A/B	0.06	0.10	0.11

3)-Computer system upgrade proposal offers the largest amount of present value per dollar of investment.