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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 Ramp Computer Equipment Facilities Network Amount to be invested $862,100 $529,165 $269,313 Annual net cash flows: Year 1 388,000 275,000 175,000 Year 2 361,000 248,000 121,000 Year 3 330,000 220,000 88,000

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 Ramp Computer Equipment Facilities Network Amount to be invested $862,100 $529,165 $269,313 Annual net cash flows: Year 1 388,000 275,000 175,000 Year 2 361,000 248,000 121,000 Year 3 330,000 220,000 88,000

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Net Present Value Method, Present Value Index, and Analysis for a service company

 

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 Ramp Computer Equipment Facilities Network Amount to be invested $862,100 $529,165 $269,313 Annual net cash flows: Year 1 388,000 275,000 175,000 Year 2 361,000 248,000 121,000 Year 3 330,000 220,000 88,000 Present Value of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 0.890 0.826 0.797 0.756 0.694 0.840 0.751 0.712 0.658 0.579 4 0.792 0.683 0.636 0.572 0.482 0.747 0.621 0.567 0.497 0.402 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 0.592 0.424 0.361 0.284 0.194 10 0.558 0.386 0.322 0.247 0.162
Transcribed Image Text: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 Ramp Computer Equipment Facilities Network Amount to be invested $862,100 $529,165 $269,313 Annual net cash flows: Year 1 388,000 275,000 175,000 Year 2 361,000 248,000 121,000 Year 3 330,000 220,000 88,000 Present Value of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 0.890 0.826 0.797 0.756 0.694 0.840 0.751 0.712 0.658 0.579 4 0.792 0.683 0.636 0.572 0.482 0.747 0.621 0.567 0.497 0.402 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 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 $1 table above. If required, use the minus sign to indicate a negative net present value. If required, round to the nearest dollar. Maintenance Equipment Ramp Facilities Computer Network Present value of net cash flow total 2$ $4 Amount to be invested %$ Net present value 2. Determine a present value index for each proposal. If required, round your answers to two decimal places. Present Value Index Maintenance Equipment Ramp Facilities Computer Network 3. The has the largest present value index. Although has the largest net present value, it returns less present value per dollar invested than does the , as revealed by the present value indexes. The present value index for the is less than 1, indicating that it does not meet the minimum rate of return standard.
Transcribed Image Text: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 $1 table above. If required, use the minus sign to indicate a negative net present value. If required, round to the nearest dollar. Maintenance Equipment Ramp Facilities Computer Network Present value of net cash flow total 2$ $4 Amount to be invested %$ Net present value 2. Determine a present value index for each proposal. If required, round your answers to two decimal places. Present Value Index Maintenance Equipment Ramp Facilities Computer Network 3. The has the largest present value index. Although has the largest net present value, it returns less present value per dollar invested than does the , as revealed by the present value indexes. The present value index for the is less than 1, indicating that it does not meet the minimum rate of return standard.
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