Question - Rocky Mountain 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:
Route Expansion Acquire Railcars New Maintenance Yard
Amount to be invested $560,000 $280,000 $425,000
Annual net cash flows:
Year 1 200,000 140,000 175,000
Year 2 250,000 130,000 175,000
Year 3 350,000 125,000 200,000
Instructions:
a. Assuming that the desired rate of return is 15%, prepare a net present value analysis for each proposal.
b. Determine a present value index for each proposal. Round to two decimal places.
c. Choose which proposal is best.