Net Present Value Method, An index computed by dividing the total present value

Question

Net Present Value Method, An index computed by dividing the total present value of the net cash flow to be received from a proposed capital investment by the amount to be invested.Present Value Index, and Analysis

United Bankshores, Inc. wishes to evaluate three capital investment proposals by using the net present value method. Relevant data related to the proposals are summarized as follows:

Required:

1. Assuming that the desired rate of return is 10%, 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.

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

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

Install Internet Bill-Pay

Branch Office Expansion

Computer System Upgrade

Branch
Office
Expansion Computer
System
Upgrade Install
Internet
Bill-Pay Amount to be invested $694,573 $502,225 $291,916 Annual net cash flows: Year 1 336,000 245,000 151,000 Year 2 312,000 221,000 104,000 Year 3 286,000 196,000 76,000

Explanation / Answer

Answer to Queston 1 Net Present Value (NPV) analysis.

Answer to Q. No.2. Present Value Index

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

Branch Office Expansion offers the largest amount of present value per dollar of investment.

Year Particular Branch Office Expansion Computer system upgrade Install Internet Bill pay 1 Annual net cah flow-Year 1 336000 245000 151000 Discounting Factor @10% 0.909 0.909 0.909 DCF-1 305424 222705 137259 2 Annual net cah flow- Year 2 312000 221000 104000 Discounting Factor @10% 0.826 0.826 0.826 DCF-2 257712 182546 85904 3 Annual net cah flow-Year 3 286000 196000 76000 Discounting Factor @10% 0.751 0.751 0.751 DCF-3 214786 147196 57076 (A)Present Value of Cash Flows($) (Total of DCF1,2,3) 777,922 552,447 280,239 (B) Amount to be invested ($) 694,573 502,225 291,916 (C) Net Present Value in $ (A-B) 83,349 50,222 -11,677 Note DCF = Cash flow x DF

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