Question

Tasty Doughnuts has computed the net present value for capital expenditure at two locations. Relevant data related to the computation are as follows: Des Moines Cedar Rapids Total present value of net cash flow $712,500 $848,000 Amount to be invested (750,000) (800,000) Net present value $(37,500) $ 48,000 a. Determine the present value index for each proposal. Round your answers for the present value index to two 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

Answer 1

First location 0.95

Second location is 1.06

My analysis is in support of the second location with a present value index

Step-by-step explanation:

Present value index compares the present value of cash inflows a project with the actual amount invested initially on the project.

A present value in of greater than one suggest that the net present value outweighs the initial capital outlay.

First location:

initial investment was $750,000

present value of cash inflows is $712,500

present value index= $712,500/750,000=0.95

Second location:

initial investment was $800,000

present value of cash inflows is $848,000

present value index= $848,000/$800,000=1.06