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 $840,838 $526,245 $299,134 Annual net cash flows: Year 1 435,000 318,000 183,000 Year 2 405,000 286,000 126,000 Year 3 370,000 254,000 92,000 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 20%, 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. The computer 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