Continental Railroad Company is evaluating three capital investment proposals by using the net present value method. Relevant data related to the…

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

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