1.
Net present value method is the method which is used to compare the initial
To determine: The net present value of each investment, using the present value of $1 table in Exhibit 2.
2.
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:
To calculate: The present value index of the investment proposals.
3.
To explain: The proposal that offers the largest amount of present value per dollar of investment.
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Chapter 26 Solutions
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- First United Bank Inc. is evaluating three capital investment projects using the net present value method. Relevant data related to the projects are summarized as follows:  BranchOfficeExpansion ComputerSystemUpgrade ATMKioskExpansion Amount to be invested $686,053  $516,654  $295,458  Annual net cash flows:        Year 1 411,000  288,000  177,000   Year 2 382,000  259,000  122,000   Year 3 349,000  230,000  89,000   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 20%, prepare a net present value analysis for each project. Use the…arrow_forwardAverage Rate of Return Method, Net Present Value Method, and Analysis The capital investment committee of Overnight Express Inc. is considering two investment projects. The estimated income from operations and net cash flows from each investment are as follows:  Distribution Center Expansion  Internet Tracking Technology Year Income fromOperations NetCash Flow  Income fromOperations NetCash Flow 1 $55,000    $175,000     $116,000    $280,000    2 55,000    175,000     88,000    236,000    3 55,000    175,000     44,000    166,000    4 55,000    175,000     19,000    114,000    5 55,000    175,000     8,000    79,000    Total $275,000    $875,000     $275,000    $875,000     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…arrow_forwardAverage Rate of Return Method, Net Present Value Method, and Analysis The capital investment committee of Ellis Transport and Storage Inc. is considering two investment projects. The estimated income from operations and net cash flows from each investment are as follows:  Warehouse  Tracking Technology Year Income fromOperations Net CashFlow  Income fromOperations Net CashFlow 1 $50,400  $162,000   $106,000  $259,000  2 50,400  162,000   81,000  219,000  3 50,400  162,000   40,000  154,000  4 50,400  162,000   18,000  105,000  5 50,400  162,000   7,000  73,000  Total $252,000  $810,000   $252,000  $810,000   Each project requires an investment of $560,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 12% for purposes of the net present value analysis. 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…arrow_forward
- The capital investment committee of Ellis Transport and Storage Inc. is considering two investment projects. The estimated income from operations and net cash flows from each investment are as follows:  Warehouse  Tracking Technology Year Income fromOperations Net CashFlow  Income fromOperations Net CashFlow 1 $62,000  $200,000   $130,000  $320,000  2 62,000  200,000   99,000  270,000  3 62,000  200,000   50,000  190,000  4 62,000  200,000   22,000  130,000  5 62,000  200,000   9,000  90,000  Total $310,000  $1,000,000   $310,000  $1,000,000   Each project requires an investment of $620,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 15% for purposes of the net present value analysis. 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…arrow_forwardNet 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 Ramp Computer Equipment Facilities Network Amount to be invested $793,083 $482,728 $224,858 Annual net cash flows: Year 1 303,000 218,000 127,000 Year 2 282,000 196,000 88,000 Year 3 258,000 174,000 64,000 Present Value of $1 at Compound Interest Year 6% 10% 12% 15% 20% 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 0.747 0.621 0.567 0.497 0.402 0.705 0.564 0.507 0.432 0.335 7 0.665 0.513 0.452 0.376 0.279arrow_forwardNet 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 Ramp Computer Equipment Facilities Network Amount to be invested $584,941 $345,013 $180,795 Annual net cash flows: Year 1 282,000 192,000 124,000 Year 2 262,000 173,000 86,000 Year 3 240,000 154,000 62,000 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 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 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 20%, prepare a net present value analysis for each proposal. Use the present…arrow_forward
- 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: Line Item Description Maintenance Equipment Ramp Facilities Computer Network Amount to be invested $551,372 $327,621 $172,660 Annual net cash flows:       Year 1 277,000 186,000 125,000    Year 2 258,000 167,000 86,000    Year 3 235,000 149,000 63,000  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 20%, prepare a net present value analysis for each proposal. Use the present value of $1 table above. If required,…arrow_forwardNet 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 Ramp Computer Equipment Facilities Network Amount to be invested $815,432 $506,778 $250,000 Annual net cash flows: Year 1 363,000 261,000 160,000 Year 2 338,000 235,000 110,000 Year 3 309,000 209,000 80,000 Present Value of $1 at Compound Interest Year 6% 10% 12% 15% 20% 0.943 0.909 0.893 0.870 0.833 0.890 0.826 0.797 0.756 0.694 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 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 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…arrow_forwardThe capital investment committee of Overnight Express Inc. is considering two investment projects. The estimated income from operations and net cash flows from each investment are as follows:  Distribution Center Expansion  Internet Tracking Technology Year Income fromOperations NetCash Flow  Income fromOperations NetCash Flow 1 $60,000    $185,000     $126,000    $296,000    2 60,000    185,000     96,000    250,000    3 60,000    185,000     48,000    176,000    4 60,000    185,000     21,000    120,000    5 60,000    185,000     9,000    83,000    Total $300,000    $925,000     $300,000    $925,000     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…arrow_forward
- The capital investment committee of Ellis Transport and Storage Inc. is considering two investment projects. The estimated income from operations and net cash flows from each investment are as follows:  Warehouse  Tracking Technology Year Income fromOperations Net CashFlow  Income fromOperations Net CashFlow 1 $44,000  $145,000   $92,000  $232,000  2 44,000  145,000   70,000  196,000  3 44,000  145,000   35,000  138,000  4 44,000  145,000   15,000  94,000  5 44,000  145,000   8,000  65,000  Total $220,000  $725,000   $220,000  $725,000   Each project requires an investment of $440,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 10% for purposes of the net present value analysis. 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…arrow_forwardContinental 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:  MaintenanceEquipment RampFacilities ComputerNetwork Amount to be invested $614,361  $418,741  $186,316  Annual net cash flows:        Year 1 318,000  229,000  134,000   Year 2 296,000  206,000  92,000   Year 3 270,000  183,000  67,000   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 20%, prepare a net present value analysis for each proposal. Use…arrow_forwardNet 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 $8,000,000  $20,000,000  $9,000,000 Annual net cash flows:       Year 1   4,000,000   12,000,000   6,000,000    Year 2   3,500,000   10,000,000   5,000,000    Year 3   2,500,000   9,000,000   4,000,000  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.…arrow_forward
- Managerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College PubFinancial And Managerial AccountingAccountingISBN:9781337902663Author:WARREN, Carl S.Publisher:Cengage Learning,EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT