Question

Net Present Value Method, Present Value Index, and Analysis

Donahue Industries Inc. wishes to evaluate three capital investment projects by using the net present value method. Relevant data related to the projects are summarized as follows:

		Product Line Expansion		Distribution Facilities		Computer Network
Amount to be invested		$774,224		$487,345		$299,490
Annual net cash flows:
	Year 1	356,000		246,000		160,000
	Year 2	331,000		221,000		110,000
	Year 3	303,000		197,000		80,000

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 12%, prepare a net present value analysis for each project. Use the present value of $1 table presented above in your computations. If the net present value is negative, enter a negative amount.

	Product Line Expansion		Distribution Facilities		Computer Network
Present value of net cash flow total	$		$		$
Amount to be invested
Net present value	$		$		$

2. Determine a present value index for each proposal. Round your answers to two decimal places.

	Present Value Index (Rounded)
Product Line Expansion
Distribution Facilities
Computer Network

3. The distribution facilities  has the largest present value index. Thecomputer network  has the lowest net present value and it returns less  present value per dollar invested than both the product line and distribution facilities , as revealed by the present value indexes. The present value index for the computer network  is less than 1, indicating that it does not meet the minimum rate of return standard.

Answer 1

Part 1

	Product Line Expansion		Distribution Facilities		Computer Network
Present value of net cash flow total	797451	(356000*0.893)+(331000*0.797)+(303000*0.712)	536079	(246000*0.893)+(221000*0.797)+(197000*0.712)	287510	(160000*0.893)+(110000*0.797)+(80000*0.712)
Amount to be invested	774224		487345		299490
Net present value	23227		48734		-11980

Part 2

	Present Value Index (Rounded)
Product Line Expansion	1.03 (774224+23227)/774224
Distribution Facilities	1.10 (487345+48734)/487345
Computer Network	0.96 (299490-11980)/299490

In part 3, the provided is appropriate.