Question

Present Value Index

Tasty Doughnuts has computed the net present value for capital expenditure at two locations. Relevant data related to the computation are as follows:

	Des Moines		Cedar Rapids
Total present value of net cash flow	$265,780		$339,040
Amount to be invested	(274,000)		(326,000)
Net present value	$(8,220)		$13,040

a. Determine the present value index for each proposal. Round your answers for the present value index to two decimal places.

	Des Moines	Cedar Rapids
Total present value of net cash flow	$	$
Amount to be invested	$	$
Present value index

b. Which location does your analysis support? (If both present value indexes are the same, either location will grade as correct.)
Cedar Rapids , because the net present value index is greater than  1.

Answer 1

Working Notes:	Des Moines	Cedar Rapids
	Initital Investment	$                    2,74,000	$            3,26,000
	PREsent Value of Cash inflow	$                    2,65,780	$            3,39,040
Solution: A
	Calcutaltion of Pesent value Index
		Des Moines	Cedar Rapids
	Total Present value of net cash Flow (A)	$                    2,65,780	$            3,39,040
	Amount to be invested (B)	$                    2,74,000	$            3,26,000
	Present Value Index (A/B)	0.97	1.04
Solution: B
	We can support Cedar Rapids , because the net present value index is greater than  1.