Concept explainers
1.
Net present value method is the method which is used to compare the initial
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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Financial & Managerial Accounting
- Average rate of return method, net present value method, and analysis for a service company The capital investment committee of Arches Landscaping Company is considering two capital investments. The estimated operating income and net cash flows from each investment are as follows: Each project requires an investment of 75,000. 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. Instructions 1. Compute the following: A. The average rate of return for each investment. B. The net present value for each investment. Use the present value table appearing in Exhibit 2 of this chapter. (Round present values to the nearest dollar.) 2. Prepare a brief report for the capital investment committee, advising it on the relative merits of the two investments.arrow_forwardNet present value method, internal rate of return method, and analysis for a service company The management of Advanced Alternative Power Inc. is considering two capital investment projects. The estimated net cash flows from each project are as follows: The wind turbines require an investment of 887,600, while the biofuel equipment requires an investment of 911,100. No residual value is expected from either project. Instructions 1. Compute the following for each project: A. The net present value. Use a rate of 6% and the present value of an annuity table appearing in Exhibit 5 of this chapter. B. A present value index. (Round to two decimal places.) 2. Determine the internal rate of return for each project by (A) computing a present value factor for an annuity of 1 and (B) using the present value of an annuity of 1 table appearing in Exhibit 5 of this chapter. 3. What advantage does the internal rate of return method have over the net present value method in comparing projects?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 $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
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- Net Present Value Method, Present Value Index, and Analysis Continental Railroad Company is evaluating three capital investment proposals 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. Assuming that the…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: MaintenanceEquipment RampFacilities ComputerNetwork Amount to be invested $909,173 $541,268 $278,555 Annual net cash flows: Year 1 405,000 284,000 178,000 Year 2 377,000 256,000 123,000 Year 3 344,000 227,000 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…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: MaintenanceEquipment RampFacilities ComputerNetwork Amount to be invested $898,519 $578,342 $279,983 Annual net cash flows: Year 1 389,000 276,000 171,000 Year 2 362,000 248,000 118,000 Year 3 331,000 221,000 86,000 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…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_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 $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 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 12%, prepare a net present value analysis for each proposal. Use…arrow_forwardContinental Railroad Company is evaluating three capital investment proposals 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. Assuming that the desired rate of return is 20%, prepare a net present value…arrow_forward
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