Question

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		$720,998		$429,044		$230,090
Annual net cash flows:
	Year 1	321,000		225,000		151,000
	Year 2	299,000		203,000		104,000
	Year 3	273,000		180,000		76,000

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 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	$	$	$

(if explanations to get answers could be posted i would greatly appreciate that)

Answer 1

Solution

	Maintenance Equipment	Ramp Facilities	Computer Network
Present value of net cash flow total	$              684,948	$              467,658	$              260,002
Amount to be invested	$              720,998	$              429,044	$              230,090
Net present value	$              (36,050)	$                 38,614	$                 29,912

.Working

	Cash Flow (A)			PV factor (B)	Present value(C=A x B)
Year	Maintenance Equipment	Ramp Facilities	Computer Network		Maintenance Equipment	Ramp Facilities	Computer Network
1	$      321,000	$    225,000	$      151,000	0.870	$     279,270	$       195,750	$        131,370
2	$      299,000	$    203,000	$      104,000	0.756	$     226,044	$       153,468	$          78,624
3	$      273,000	$    180,000	$        76,000	0.658	$     179,634	$       118,440	$          50,008
Present value of net cash flow total					$     684,948	$       467,658	$        260,002