Question

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?

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