Net Present Value Method, Present Value Index, and Analysis for a Service Company First United Bank Inc. is evaluating three capital investment projects by 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 $420,000 $350,000 $520,000 Annual net cash flows: Year 1 200,000 190,000 275,000 Year 2 160,000 180,000 250,000 Year 3 160,000 170,000 250,000 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 project. 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 Total present value of net cash flow $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 project. 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 ATM Kiosk Expansion fill in the blank 12 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.

Net Present Value Method, Present Value Index, and Analysis for a Service Company First United Bank Inc. is evaluating three capital investment projects by 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 $420,000 $350,000 $520,000 Annual net cash flows: Year 1 200,000 190,000 275,000 Year 2 160,000 180,000 250,000 Year 3 160,000 170,000 250,000 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 project. 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 Total present value of net cash flow $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 project. 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 ATM Kiosk Expansion fill in the blank 12 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.

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

First United Bank Inc. is evaluating three capital investment projects by 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	$420,000		$350,000	$520,000
Annual net cash flows:
Year 1	200,000	190,000	275,000
Year 2	160,000	180,000	250,000
Year 3	160,000	170,000	250,000

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 project. 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
Total present value of net cash flow	$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 project. 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
ATM Kiosk Expansion	fill in the blank 12

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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