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		$783,240		$531,394		$308,533
Annual net cash flows:
	Year 1	382,000		279,000		172,000
	Year 2	355,000		251,000		119,000
	Year 3	325,000		223,000		86,000

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

Solution 1:

Computation of NPV - Donahue Industries Inc.
			Product line expansion		Distribution facilities		Computer Network
Particulars	Period	PV Factor	Amount	Present Value	Amount	Present Value	Amount	Present Value
Cash outflows:
Amount to be invested	0	1	$783,240	$783,240	$531,394	$531,394	$308,533	$308,533
Present Value of Cash outflows (A)				$783,240		$531,394		$308,533
Cash Inflows
Year 1	1	0.87000	$382,000	$332,340	$279,000	$242,730	$172,000	$149,640
Year 2	2	0.75600	$355,000	$268,380	$251,000	$189,756	$119,000	$89,964
Year 3	3	0.65800	$325,000	$213,850	$223,000	$146,734	$86,000	$56,588
Present Value of Cash Inflows (B)				$814,570		$579,220		$296,192
Net Present Value (NPV) (B-A)				$31,330		$47,826		-$12,341

Solution 2:

Computation of Present Value Index
Particulars	Product line Expansion	Distribution Facilities	Computer Network
Present Value of Cash Inflows	$814,570	$579,220	$296,192
Present Value of Cash Outflows	$783,240	$531,394	$308,533
Present Value Index (PV of cash inflows / PV of cash outflows)	1.04	1.09	0.96