Net Present Value Method, Present Value Index, and Analysis
Northern Highlands 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:
Present Value of $1 at Compound InterestYear6%10%12%15%20%10.9430.9090.8930.8700.83320.8900.8260.7970.7560.69430.8400.7510.7120.6580.57940.7920.6830.6360.5720.48250.7470.6210.5670.4970.40260.7050.5640.5070.4320.33570.6650.5130.4520.3760.27980.6270.4670.4040.3270.23390.5920.4240.3610.2840.194100.5580.3860.3220.2470.162Required:
1. Assuming that the desired rate of return is 20%, prepare a net present value analysis for each proposal. Use the present value of $1 table above. If required, use the minus sign to indicate a negative net present value. If required, round to the nearest dollar.
New Maintenance YardRoute ExpansionAcquire RailcarsPresent value of net cash flow total$ $ $ Less 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 IndexNew Maintenance Yard Route Expansion Acquire Railcars 3. The Selectnew maintenance yardroute expansionrailcars
Item 13 has the largest present value index. Although Selectnew maintenance yardroute expansionrailcars
Item 14 has the largest net present value, it returns less present value per dollar invested than does the Selectnew maintenance yardroute expansionrailcars
Item 15 , as revealed by the present value indexes. The present value index for acquiring the Selectnew maintenance yardroute expansionrailcars
Item 16 is less than 1, indicating that it does not meet the minimum rate of return standard.
1. Present value = cash flow*present value of $1 at 6% as the desired rate of return = 6%. Also,please note that PV factor for year 0 = 1.(PV of 1st year cash flow of branch office expansion…
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