Net Present Value Method, Present Value Index, and Analysis
United Bankshores, Inc. wishes to evaluate three capitalinvestment proposals by using the net present value method.Relevant data related to the proposals are summarized asfollows:
| Branch
Office
Expansion | Computer
System
Upgrade | Install
Internet
Bill-Pay |
| Amount to be invested | $575,292 | | $377,600 | | $191,050 | |
| Annual net cash flows: | | | | | | |
| Year 1 | 286,000 | | 200,000 | | 123,000 | |
| Year 2 | 266,000 | | 180,000 | | 85,000 | |
| Year 3 | 243,000 | | 160,000 | | 62,000 | |
| Present Value of $1 at CompoundInterest |
| Year | 6% | 10% | 12% | 15% | 20% |
| 1 | 0.943 | 0.909 | 0.893 | 0.870 | 0.833 |
| 2 | 0.890 | 0.826 | 0.797 | 0.756 | 0.694 |
| 3 | 0.840 | 0.751 | 0.712 | 0.658 | 0.579 |
| 4 | 0.792 | 0.683 | 0.636 | 0.572 | 0.482 |
| 5 | 0.747 | 0.621 | 0.567 | 0.497 | 0.402 |
| 6 | 0.705 | 0.564 | 0.507 | 0.432 | 0.335 |
| 7 | 0.665 | 0.513 | 0.452 | 0.376 | 0.279 |
| 8 | 0.627 | 0.467 | 0.404 | 0.327 | 0.233 |
| 9 | 0.592 | 0.424 | 0.361 | 0.284 | 0.194 |
| 10 | 0.558 | 0.386 | 0.322 | 0.247 | 0.162 |
Required:
1. Assuming that the desired rate of return is15%, prepare a net present value analysis for each proposal. Usethe present value of $1 table above. If required, use the minussign to indicate a negative net present value. If required, roundto the nearest dollar.
| Branch Office Expansion | Computer System Upgrade | Install Internet Bill-Pay |
| Present value of net cash flow total | $ | $ | $ |
| Amount to be invested | $ | $ | $ |
| Net present value | $ | $ | $ |
2. Determine a present value index for eachproposal. If required, round your answers to two decimalplaces.
| Present Value Index |
| Branch Office Expansion | |
| Computer System Upgrade | |
| Install Internet Bill-Pay | |
3. Which proposal offers the largest amount ofpresent value per dollar of investment?
