Question

First United Bank Inc. is evaluating three capital investment projects using the net present value method. Relevant data related to the projects are summarized as follows:

		Branch Office Expansion		Computer System Upgrade		ATM Kiosk Expansion
Amount to be invested		$750,769		$459,475		$219,567
Annual net cash flows:
	Year 1	287,000		198,000		123,000
	Year 2	267,000		178,000		85,000
	Year 3	244,000		158,000		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 6%, 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	ATM Kiosk Expansion
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

Answer 1

	Branch office	Computer System Upgrade	Kiosk Expansion
Present value Index	0.95	1.04	1.11
NPV	-37,538.00	18,379.00	24,152.00

Decision Making

If NPV is positive we can accept the project

If Present value index is greater than 1 , We can accept the project

Since the NPV and present value index are more desirable to go for Kiosk Expansion, It is advisable to Accept Kiosk Expansion Project

Calculation of NPV
		Branch Office	Computer System Upgrade	Kiosk Expansion
Year	PVF @ 6%	Cash inflows	PV of Cash cashflows	Cash inflows	PV of Cash cashflows	Cash inflows	PV of Cash cashflows
1	0.943	2,87,000.00	2,70,641.00	1,98,000.00	1,86,714.00	1,23,000.00	1,15,989.00
2	0.89	2,67,000.00	2,37,630.00	1,78,000.00	1,58,420.00	85,000.00	75,650.00
3	0.84	2,44,000.00	2,04,960.00	1,58,000.00	1,32,720.00	62,000.00	52,080.00
Sum of Present value of cash inflows		7,13,231.00		4,77,854.00		2,43,719.00
Present value of cash outflows		7,50,769.00		4,59,475.00		2,19,567.00
NPV(Present value of Cash inflows (-) Present value of cash outflows)	-37,538.00		18,379.00		24,152.00

Calculation of Present value Index
Particulars	Branch office	Computer System Upgrade	Kiosk Expansion
Sum of Present value of cash inflows	7,13,231.00	4,77,854.00	2,43,719.00
Present value of cash outflows	7,50,769.00	4,59,475.00	2,19,567.00
Present value Index
PV of Cash inflows/PV of cash outflows		0.95	1.04	1.11