Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
Capital Investment Analysis: Continental Railroad Company
Transcribed Image Text:Net 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
$787,532
$527,721
$244,753
Annual net cash flows:
Year 1
337,000
246,000
145,000
Year 2
313,000
221,000
100,000
Year 3
286,000
197,000
73,000
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
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 10%, 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.
Transcribed Image Text:Required:
1. Assuming that the desired rate of return is 10%, 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.
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
Expert Solution
Step 1
Net Present Value is the difference of Present Value of Cash Inflow and outflow. Excess of Present Value of Cash Inflow to Cash Outflow indicates that investment in a particular field is viable. While negative figure indicates that cash inflow will not be able to cover the investment.
Present Value Index is the ratio of Present Value of Future Cash Flows to that of Initial Investment. A ratio below 1 is rejected while a ratio greater than 1 is accepted.
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