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:

Line Item Description	Maintenance Equipment	Ramp Facilities	Computer Network
Amount to be invested	$827,093	$521,315	$269,720
Annual net cash flows:
Year 1	376,000	271,000	177,000
Year 2	350,000	244,000	122,000
Year 3	320,000	217,000	89,000

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 15%, 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.

Line Item Description	Maintenance Equipment	Ramp Facilities	Computer Network
Total present value of net cash flow
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.

Line Item Description	Present Value Index
Maintenance Equipment
Ramp Facilities
Computer Network

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.