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		$735,596		$447,586		$274,176
Annual net cash flows:
	Year 1	362,000		250,000		156,000
	Year 2	337,000		225,000		108,000
	Year 3	308,000		200,000		78,000

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

3. The has the largest present value index. The has the lowest net present value and it returns present value per dollar invested than , as revealed by the present value indexes. The present value index for the is less than 1, indicating that it does not meet the minimum rate of return standard.

Answer 1

		Product Line		Distribution		Computer Network
Year	PVF at 15%	Cashflow	PV of CF	Cashflows	PV of CF	Cashflows	PV at CF
1	0.87	362000	314940	250000	217500	156000	135720
2	0.756	337000	254772	225000	170100	108000	81648
3	0.658	308000	202664	200000	131600	78000	51324
	Present value of inflows		772376		519200		268692
	Less: Initial investment		735596		447586		274176
	NPV		36780		71614		-5484
Req 2.
Profitability Index = Present value of inflows/ Initial investment
		PV of inflows	Investment	PI
Product Line		772376	735596	1.05
Diistribution		519200	447586	1.16
Computer network		268692	274176	0.98
Req 3.
the Distribution has the largest present value index.
The product line has lowest NPV than Distribution
The present value index for Computer network is less than 1, indicating it does not meet the minimum rate of return