Question

# Net Present Value Method, Present Value Index, and Analysis Donahue Industries Inc. wishes to evaluate three...

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 \$694,151 \$468,140 \$249,778 Annual net cash flows: Year 1 316,000 234,000 136,000 Year 2 294,000 211,000 94,000 Year 3 269,000 187,000 68,000
 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

#### Homework Answers

Answer #1

Present value of net cash flow total = [PVF 12%,1*CF1]+[PVF 12%,2*CF2]+[PVF 12%,3*CF3]

 Product Line Expansion Distribution Facilities Computer Network Present value of net cash flow total [.893*316000]+[.797*294000]+[.712*269000]. 282188+ 234318+ 191528 708034 [.893*234000]+[.797*211000]+[.712*187000] 208962+ 168167+ 133144 510273 [.893*136000]+[.797*94000]+[.712*68000] 121448+ 74918+ 48416 244782 Amount to be invested (694151) (468140) (249778) NPV 13883 42133 -4996

B)Profitability index = Present value /Initial investment

 Product Line Expansion 708034/694151=1.02 Distribution Facilities 510273/468140= 1.09 Computer Network 244782/249778= .98
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