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 |
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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