Question

United Bankshores, Inc. wishes to evaluate three capital investment proposals by using the net present value...

United Bankshores, Inc. wishes to evaluate three capital investment proposals by using the net present value method. Relevant data related to the proposals are summarized as follows:

Branch
Office
Expansion
Computer
System
Upgrade
Install
Internet
Bill-Pay
Amount to be invested $532,596 $353,235 $210,792
Annual net cash flows:
Year 1 311,000 208,000 146,000
Year 2 289,000 187,000 101,000
Year 3 264,000 166,000 73,000
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 proposal. Use the present value of $1 table above. If required, use the minus sign to indicate a negative net present value. If required, round to the nearest dollar.

Branch Office Expansion Computer System Upgrade Install Internet Bill-Pay
Present value of net cash flow total $ $ $
Amount to be invested $ $ $
Net present value $ $ $

2. Determine a present value index for each proposal. If required, round your answers to two decimal places.

Present Value Index
Branch Office Expansion
Computer System Upgrade
Install Internet Bill-Pay

3. Which proposal offers the largest amount of present value per dollar of investment?

Homework Answers

Answer #1

1. Assuming that the desired rate of return is 20%, prepare a net present value analysis for each proposal.

Branch Office Expansion Computer System Upgrade Install Internet Bill-Pay
Present value of net cash flow total
612485 399156 233979
Amount to be invested -532596 -353235 -210792
Net present value 79889 45921 23187

2. Determine a present value index for each proposal. If required, round your answers to two decimal places.

Present value index
Branch Office Expansion 612485/532596 = 1.15
Computer System Upgrade 399156/353235 = 1.13
Install Internet Bill-Pay 233979/210792 = 1.11

3) Branch office expanssion has the largest amount of present value per dollar of investment

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