Net Present Value Method,Present Value Index, and Analysis

Northern Highlands 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:

Present Value of $1 at Compound InterestYear6%10%12%15%20%10.9430.9090.8930.8700.83320.8900.8260.7970.7560.69430.8400.7510.7120.6580.57940.7920.6830.6360.5720.48250.7470.6210.5670.4970.40260.7050.5640.5070.4320.33570.6650.5130.4520.3760.27980.6270.4670.4040.3270.23390.5920.4240.3610.2840.194100.5580.3860.3220.2470.162Required:

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.

New Maintenance YardRoute ExpansionAcquire RailcarsPresent 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 IndexNew Maintenance YardRoute ExpansionAcquire Railcars3.TheSelectnew maintenance yardroute expansionrailcars

Item 13has the largest present value index. AlthoughSelectnew maintenance yardroute expansionrailcars

Item 14has the largest net present value, it returns less present value per dollar invested than does theSelectnew maintenance yardroute expansionrailcars

Item 15, as revealed by the present value indexes. The present value index for acquiring theSelectnew maintenance yardroute expansionrailcars

Item 16is less than 1, indicating that it does not meet the minimum rate of return standard.