Chapter 25 Capital Investment Analysis 1295 PR 25-3A Net present value method, p

Question

Chapter 25 Capital Investment Analysis 1295 PR 25-3A 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: Obj. 3 ter 20 Maintenance Equipment $8,000,000 Ramp Facilities Computer Network Amount to be invested Annual net cash flows $20,000,000 $9,000,000 TE Year 1 Year 2 Year 3 4,000,000 3,500,000 2,500,000 12,000,000 10,000,000 9,000,000 6,000,000 5,000,000 4,000,000 Instructions I. 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.

Explanation / Answer

Solution.

Calculation of present value of different proposal.

All PV fgactor at 20% ROI.

Ramp facilities has grater NPV amount $42,147,000.

Maintenance Equipment Year Cash Flow PV Factor PV 0 $   -80,00,000 1.000 $   -80,00,000 1 $    40,00,000 0.833 $     33,32,000 2 $    35,00,000 0.694 $     24,29,000 3 $    25,00,000 0.579 $     14,47,500 NPV $     -7,91,500

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