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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		$996,044		$583,354		$311,735
Annual net cash flows:
	Year 1	413,000		277,000		190,000
	Year 2	384,000		249,000		131,000
	Year 3	351,000		222,000		95,000

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 10%, 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
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
Maintenance Equipment
Ramp Facilities
Computer Network

3. The has the largest present value index. Although has the largest net present value, it returns less present value per dollar invested than does the , 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

Present value of Net Cash Inflow:
Year	Discounting @20%	Maintenance Equipment		Ramp Facilities		Computer Network
		Cash Flow	NPV	Cash Flow	NPV	Cash Flow	NPV
1	0.909	413000	375417	277000	251793	190000	172710
2	0.826	384000	317184	249000	205674	131000	108206
3	0.751	351000	263601	222000	166722	95000	71345
Total		1148000	956202	748000	624189	416000	352261

1. Net Present Value Analysis:
	Maintenance Equipment	Ramp Facilities	Computer Network
Present value of net cash flow total	956202	624189	352261
Less amount to be invested	996044	583354	311735
Net present value	-39842	40835	40526

2. Present value Index:
	Present value of Cash Inflow	PV of Cash Outflow	Present Value Index
Maintenance Equipment	956202	996044	0.96
Ramp Facilities	624189	583354	1.07
Computer Network	352261	311735	1.13