Double K Doughnuts has computed the net present value for capital expenditure at two locations

Double K Doughnuts has computed the net present value for capital expenditure at two locations. Relevant data related to the computation are as follows:

Blue Springs Lee’s Summit

Total present value of net cash flow $540,750 $484,800

Less amount to be invested 525,000 505,000

Net present value $  15,750 $ (20,200)

a. Determine the present value index for each proposal.

b. Which location does your analysis support?

Answer:

a. Present Value Index  = 

Total Present Value of Net Cash Flow 

Amount to Be Invested 

Present value index 

of Blue Springs:  = 

Present value index 

of Lee’s Summit:  = 

$540,750 

$525,000 

$484,800 

$505,000 

=  1.03 

=  0.96 

b. The analysis supports investing in Blue Springs because the present value 

index is greater than one. The Lee’s Summit investment is not supported.