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.