Assuming that the desired rate of return is 12%, 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.
Continental Railroad Company is evaluating three capital investment proposals by using the
| Maintenance Equipment |
Ramp Facilities |
Computer Network |
|||||
| Amount to be invested | $923,468 | $584,381 | $269,896 | ||||
| Annual net cash flows: | |||||||
| Year 1 | 400,000 | 292,000 | 168,000 | ||||
| Year 2 | 372,000 | 263,000 | 116,000 | ||||
| Year 3 | 340,000 | 234,000 | 84,000 |
| Present Value of $1 at |
|||||
| 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
| Maintenance Equipment | Ramp Facilities | Computer Network | |
| Total present value of net cash flow | |||
| 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.
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