Question

Net Present Value Method, Present Value Index, and Analysis

Donahue Industries Inc. wishes to evaluate three capital investment projects by using the net present value method. Relevant data related to the projects are summarized as follows:

		Product Line Expansion		Distribution Facilities		Computer Network
Amount to be invested		$568,347		$365,363		$216,394
Annual net cash flows:
	Year 1	280,000		190,000		123,000
	Year 2	260,000		171,000		85,000
	Year 3	238,000		152,000		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 15%, prepare a net present value analysis for each project. Use the present value of $1 table presented above in your computations. If the net present value is negative, enter a negative amount.

	Product Line Expansion		Distribution Facilities		Computer Network
Present value of net cash flow total	$		$		$
Amount to be invested
Net present value	$		$		$

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

	Present Value Index (Rounded)
Product Line Expansion
Distribution Facilities
Computer Network

Answer 1

		Product Line Expansion		Distribution Facilities		Computer Network
Year	Table Value	Cash Flows	PVCF	Cash Flows	PVCF	Cash Flows	PVCF
1	0.870	280000	243600	190000	165300	123000	107010
2	0.756	260000	196560	171000	129276	85000	64260
3	0.658	238000	156604	152000	100016	62000	40796
			596764		394592		212066

NPV

	Product Line Expansion	Distribution Facilities	Computer Network
PV of Net Cashflows	596764	394592	212066
Amount to be invested	568347	365363	216394
NPV	28417	29229	-4328

Profitability Index
	PV of Net Cashflows	Amount to be invested
Product Line Expansion	596764	568347	1.05
Distribution Facilities	394592	365363	1.08
Computer Network	212066	216394	0.98