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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 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
Total present value of net cash flow	$fill in the blank 1	$fill in the blank 2	$fill in the blank 3
Less amount to be invested	fill in the blank 4	fill in the blank 5	fill in the blank 6
Net present value	$fill in the blank 7	$fill in the blank 8	$fill in the blank 9

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

	Present Value Index
Maintenance Equipment	fill in the blank 10
Ramp Facilities	fill in the blank 11
Computer Network	fill in the blank 12

3. The

maintenance equipmentramp facilitiescomputer network

has the largest present value index. Although

maintenance equipmentramp facilitiescomputer network

has the largest net present value, it returns less present value per dollar invested than does the

maintenance equipmentramp facilitiescomputer network

, as revealed by the present value indexes. The present value index for the

maintenance equipmentramp facilitiescomputer network

is less than 1, indicating that it does not meet the minimum rate of return standard.