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. Relevant data related to the proposals are summarized as follows:

		Maintenance Equipment		Ramp Facilities		Computer Network
Amount to be invested		$823,063		$515,770		$260,629
Annual net cash flows:
	Year 1	397,000		290,000		187,000
	Year 2	369,000		261,000		129,000
	Year 3	337,000		232,000		94,000

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.

	Maintenance Equipment	Ramp Facilities	Computer Network
Total present value of net cash flow	$	$	$
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
Maintenance Equipment
Ramp Facilities
Computer Network

Answer 1

Answer-1)-

Capital Investments	Maintenence Equipment	Ramp Facilities	Computer Network
	$	$	$
Total present value of net cash flow	781910	557032	299723
Less- Amount to be invested	823063	515770	260629
Net Present Value $	-41153	41262	39094

Explanation-

Calculation of Net Present Value
		Maintenance Equipment	Ramp Facilities	Computer Network
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)
	@ 20%	$	$	$	$	$	$
1	0.833	397000	330701	290000	241570	187000	155771
2	0.694	369000	256086	261000	181134	129000	89526
3	0.579	337000	195123	232000	134328	94000	54426
	TOTAL		781910		557032		299723
	Capital Investment		823063		515770		260629
	Net Present value		-41153		41262		39094

2)-

Calulation of Project Profitablity Index
Particulars	Project Number
	Maintenence Equipment	Ramp Facilities	Computer Network
Present Value net cash inflows $ (A)	781910	557032	299723
Investment required $ (B)	823063	515770	260629
Profitablity Index C=A/B	0.95	1.08	1.15