Capital Investment Analysis Review
A Company is comparing 2 investment proposals. The company's desired rate of return is 6%. The present value
factors for $1 at compound interest of 6% for years 1 through 3 are 0.943, 0.890, and 0.840, respectively. In addition
to the foregoing information, use the following data in determining the acceptability in this situation:
Year
Amount to be invested
Project A
$426,511
Project B
$227,690
Annual Net Cash Flows:
1
2
3
189,000
170,000
151,000
130,000
90,000
65,000
Calculate the following: (round all answers to 2 decimal places)
Place your answers on the lines provided and show your work!
Project A
Cash Payback Period
Net Present Value
Present Value Index
Is the Internal Rate of Return of Project A greater than 6% or less than 6%?
How can you tell?
Which is the better investment and why?
Project B
Year
1
2
3
Total
Amount to be invested
Net present value
Year
1
2
3
Total
Amount to be invested
Net present value
2.
Present Value Index =
Project A:
Project B:
Project A
Present Value Net Cash Present Value of
of $1 at 6%
Flow
Net Cash Flow
0.943
$189,000
$178,227
0.890
170,000
151,300
0.840
151,000
126,840
$510,000
$456,367
(426,511)
$29,856
Project B
Present Value Net Cash Present Value of
of $1 at 6%
Flow
Net Cash Flow
0.943
$ 130,000
$122,590
0.890
90,000
80,100
0.840
65,000
54,600
$285,000
$257,290
(227,690)
$29,600
Total Present Value of Net Cash Flow
Amount to Be Invested
$456,367
$426,511
$257,290
$227,690
=
1.07*
=
1.13*
* Rounded
3.
Project B has the largest present value index. Although Project A has the largest net present value, it
returns less present value per dollar invested than does Project B, as revealed by the present value
indexes (1.13 compared to 1.07).