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 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, use the minus sign to indicate a negative net present value. If required, round to the nearest dollar.   Maintenance Equipment Ramp Facilities Computer Network Present value of net cash flow total $ $ $ Less 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 computer network  has the largest present value index. Although ramp facilities  has the largest net present value, it returns less present value per dollar invested than does the computer network , as revealed by the present value indexes. The present value index for the maintenance equipment  is less than 1, indicating that it does not meet the minimum rate of return standard.

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:

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, use the minus sign to indicate a negative net present value. If required, round to the nearest dollar.

2.  Determine a present value index for each proposal. If required, round your answers to two decimal places.

3.  The computer network  has the largest present value index. Although ramp facilities  has the largest net present value, it returns less present value per dollar invested than does the computer network , as revealed by the present value indexes. The present value index for the maintenance equipment  is less than 1, indicating that it does not meet the minimum rate of return standard.