Net present value method, present value index, and analysis OBJ. 3 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 Instructions 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 appearing in this chapter (Exhibit 2).

2. Determine a present value index for each proposal. Round to two decimal places.

3. Which proposal offers the largest amount of present value per dollar of investment? Explain.