Continental Railroad Company wishes to evaluate three capital investment proposals by using the net present value method. Relevant data related to the proposals are summarized as follows:

 

Route

Acquire

New Maintenance

 

Expansion

Railcars

Yard

Amount to be invested

$830,000

$480,000

$410,000

Annual net cash flows:

 

 

 

Year 1

450,000

245,000

215,000

Year 2

400,000

220,000

205,000

Year 3

370,000

190,000

200,000

Instructions

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 appearing in this chapter.

2. Determine a present value index for each proposal. Round to two decimal places.

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