In: Accounting
Net Present Value Method, Present Value Index, and Analysis
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 | $601,461 | $411,359 | $216,033 | ||||
Annual net cash flows: | |||||||
Year 1 | 317,000 | 219,000 | 133,000 | ||||
Year 2 | 295,000 | 197,000 | 92,000 | ||||
Year 3 | 269,000 | 175,000 | 67,000 |
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 12%, 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 |