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 $551,372 $327,621 $172,660 Annual net cash flows: Year 1 277,000 186,000 125,000 Year 2 258,000 167,000 86,000 Year 3 235,000 149,000 63,000 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 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. Line Item Description Maintenance Equipment Ramp Facilities Computer Network Total present value of net cash flow $fill in the blank 1 $fill in the blank 2 $fill in the blank 3 Less amount to be invested fill in the blank 4 fill in the blank 5 fill in the blank 6 Net present value $fill in the blank 7 $fill in the blank 8 $fill in the blank 9 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 fill in the blank 10 Ramp Facilities fill in the blank 11 Computer Network fill in the blank 12 3. The fill in the blank 1 of 4 has the largest present value index. Although fill in the blank 2 of 4 has the largest net present value, it returns less present value per dollar invested than does the fill in the blank 3 of 4 , as revealed by the present value indexes. The present value index for the fill in the blank 4 of 4 is less than 1, indicating that it does not meet the minimum rate of return standard

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 $551,372 $327,621 $172,660 Annual net cash flows: Year 1 277,000 186,000 125,000 Year 2 258,000 167,000 86,000 Year 3 235,000 149,000 63,000 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 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. Line Item Description Maintenance Equipment Ramp Facilities Computer Network Total present value of net cash flow $fill in the blank 1 $fill in the blank 2 $fill in the blank 3 Less amount to be invested fill in the blank 4 fill in the blank 5 fill in the blank 6 Net present value $fill in the blank 7 $fill in the blank 8 $fill in the blank 9 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 fill in the blank 10 Ramp Facilities fill in the blank 11 Computer Network fill in the blank 12 3. The fill in the blank 1 of 4 has the largest present value index. Although fill in the blank 2 of 4 has the largest net present value, it returns less present value per dollar invested than does the fill in the blank 3 of 4 , as revealed by the present value indexes. The present value index for the fill in the blank 4 of 4 is less than 1, indicating that it does not meet the minimum rate of return standard

Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter12: Capital Investment Analysis

Section: Chapter Questions

Problem 3PB: Net present value method, present value index, and analysis for a service company First United Bank...

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Question

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	$551,372	$327,621	$172,660
Annual net cash flows:
Year 1	277,000	186,000	125,000
Year 2	258,000	167,000	86,000
Year 3	235,000	149,000	63,000

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 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.

Line Item Description	Maintenance Equipment	Ramp Facilities	Computer Network
Total present value of net cash flow	$fill in the blank 1	$fill in the blank 2	$fill in the blank 3
Less amount to be invested	fill in the blank 4	fill in the blank 5	fill in the blank 6
Net present value	$fill in the blank 7	$fill in the blank 8	$fill in the blank 9

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	fill in the blank 10
Ramp Facilities	fill in the blank 11
Computer Network	fill in the blank 12

3. The fill in the blank 1 of 4

has the largest present value index. Although fill in the blank 2 of 4

has the largest net present value, it returns less present value per dollar invested than does the fill in the blank 3 of 4

, as revealed by the present value indexes. The present value index for the fill in the blank 4 of 4

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

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