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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Present value index

 Dip N’ Dunk Doughnuts has computed the net present value for capital expenditure at two locations. Relevant data related to the computation are as follows:

  Fort Collins Boulder
Total present value of net cash flow $607,600 $624,000
Less amount to be invested 620,000 600.000
Net present value $(12,400) $ 24,000

 a.    Determine the present value index for each proposal.

b.    Which location does your analysis support? Explain

a.

To determine

Present value index:

Present value index is a technique, which is used to rank the proposals of the business.  It is used by the management when the business has more investment proposals, and limited fund.

The present value index is computed as follows:

Present value index =Total present value of net cash flowAmount to be invested

To determine:  The present value index for each proposal.

Explanation

Calculate the present value index for Fort Collins:

Present value index for Fort Collins = Total presest value of cash flowAmount to be invested=$607,600$620,000=0.98

Hence, the present value index for Fort Collins is 0

b.

To determine

To analysis: The investment location which is favor to investment.

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