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		$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

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