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 $713,368 $471,275 $236,700 Annual net cash flows: Year 1 344,000 248,000 155,000 Year 2 320,000 223,000 107,000 Year 3 292,000 198,000 78,000 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. 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

Required: 1. Assuming that the desired rate of return is 20%, prepare a net present value analysis for each proposal.

Year	Discounting @20%	Branch Office Expansion		Computer system upgrade		Install internet
		Cash Flow	NPV	Cash Flow	NPV	Cash Flow	NPV
	(A)	(B)	(C=A*B)	D	E=A*D	F	G=A*F
1	0.833	344000	286552	248000	206584	155000	129115
2	0.694	320000	222080	223000	154762	107000	74258
3	0.579	292000	169068	198000	114642	78000	45162
Total		956000	677700	669000	475988	340000	248535

Net Present Value Analysis:
	Branch Office Expansion	Computer system upgrade	Install internet
Present value of net cash flow total (A)	677700	475988	248535
Less amount to be invested(B)	713368	471275	236700
Net present value(A-B)	-35668	4713	11835

	Branch Office Expansion	Computer system upgrade	Install internet
Net present value	-35668	4713	11835

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2. Determine a present value index for each proposal.

Present value index (PVI)

= sum of present value of future cash flows/initial outlay

=677700/713368

=0.95

PVI of branch office expansion project

=475988/471275

=1.01

PVI of install internet

=248535 /236700

=1.05

	Branch Office Expansion	Computer system upgrade	Install internet
Present value Index	0.95	1.01	1.05

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

Install internet offers the largest amount of present value per dollar of investment