Continental Railroad Company is evaluating three capital investment proposals by using the net present value method. Relevant data related to the proposals are summarized as follows:
Maintenance Equip. Ramp Facilities Computer Network
Amount to be invested 8000000 20000000 9000000
Annual net cash flows:
Year 1 4000000 12000000 6000000
Year 2 3500000 10000000 5000000
Year 3 2500000 9000000 4000000
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 (Exhibit 2).
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