Present Value Index Tasty Doug
Present Value Index
Tasty Doughnuts has computed the net present value for capitalexpenditure at two locations. Relevant data related to thecomputation are as follows:
| Des Moines | Cedar Rapids | |||
| Total present value of net cash flow | $265,780 | $339,040 | ||
| Amount to be invested | (274,000) | (326,000) | ||
| Net present value | $(8,220) | $13,040 | ||
a. Determine the present value index for eachproposal. Round your answers for the present value index totwo decimal places.
| Des Moines | Cedar Rapids | |
| Total present value of net cash flow | $ | $ |
| Amount to be invested | $ | $ |
| Present value index |
b. Which location does your analysis support?(If both present value indexes are the same, either location willgrade as correct.)Cedar Rapids , because the net present value index is greaterthan 1.
Answer:
| WorkingNotes: | Des Moines | Cedar Rapids | |
| Initital Investment | $ 2,74,000 | $ 3,26,000 | |
| PREsent Value of Cashinflow | $ 2,65,780 | $ 3,39,040 | |
| Solution:A | |||
| Calcutaltion of Pesent valueIndex | |||
| Des Moines | Cedar Rapids | ||
| Total Present value of net cash Flow(A) | $ 2,65,780 | $ 3,39,040 | |
| Amount to be invested (B) | $ 2,74,000 | $ 3,26,000 | |
| Present Value Index (A/B) | 0.97 | 1.04 | |
| Solution:B | |||
| We can support Cedar Rapids , becausethe net present value index is greaterthan 1. | |||
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