Reference no: EM132690530

Problem - Net present value method, present value index, and analysis

Mid-Continent 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:

	New Maintenance Yard	Route Expansion	Acquire Railcars
Amount to be invested	$12,000,000	$20,000,000	$36,000,000
Annual net cash flows:
Year 1	6,000,000	12,000,000	22,000,000
Year 2	4,800,000	11,000,000	18,500,000
Year 3	4,500,000	9,500,000	16,000,000

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.