Answered: First United Bank Inc. is evaluating…

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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Question

Net Present Value Method, Present Value Index, and Analysis

First United Bank Inc. is evaluating three capital investment projects using the net present value method. Relevant data related to the projects are summarized as follows:

	Branch Office Expansion	Computer System Upgrade	ATM Kiosk Expansion
Amount to be invested	$563,602		$407,841		$234,202
Annual net cash flows:
	Year 1	312,000		228,000		147,000
	Year 2	290,000		205,000		101,000
	Year 3	265,000		182,000		74,000

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.

	Branch Office Expansion	Computer System Upgrade	ATM Kiosk Expansion
Present value of net cash flow total	$fill in the blank 1	$fill in the blank 2	$fill in the blank 3
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.

	Present Value Index
Branch Office Expansion	fill in the blank 10
Computer System Upgrade	fill in the blank 11
Install Internet Bill-Pay	fill in the blank 12

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

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