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		$733,787		$514,437		$260,321
Annual net cash flows:
	Year 1	365,000		270,000		150,000
	Year 2	339,000		243,000		103,000
	Year 3	310,000		216,000		75,000

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

• Working

		Product Line Expansion		Distribution Facilities		Computer Network
Year	PV Factor at 15%	Cash Flows	Present Value of Cash Flows [ Cash flows x PV Factor]	Cash Flows	Present Value of Cash Flows [ Cash flows x PV Factor]	Cash Flows	Present Value of Cash Flows [ Cash flows x PV Factor]
1	0.870	$365,000	$317,550	$270,000	$234,900	$150,000	$130,500
2	0.756	$339,000	$256,284	$243,000	$183,708	$103,000	$77,868
3	0.658	$310,000	$203,980	$216,000	$142,128	$75,000	$49,350
	Total	$1,014,000	$777,814	$729,000	$560,736	$328,000	$257,718

• Requirement 1

	Product Line Expansion	Distribution Facilities	Computer Network
Present value of net cash flow total	$777,814	$560,736	$257,718
Amount to be invested	$733,787	$514,437	$260,321
Net present value	$44,027	$46,299	($2,603)

• Requirement 2

		Product Line Expansion	Distribution Facilities	Computer Network
A	Net present value	$44,027	$46,299	($2,603)
B	Amount to be invested	$733,787	$514,437	$260,321
C = A/B	Present Value Index	0.06	0.09	-0.01