Question

The following data are accumulated by Geddes Company in evaluating the purchase of $140,000 of equipment, having a four-year useful life:

	Net Income		Net Cash Flow
Year 1	$42,000		$77,000
Year 2	26,500		61,500
Year 3	13,000		48,000
Year 4	4,000		39,000

Assuming that the desired rate of return is 15%, determine the net present value for the proposal. If required, round to the nearest dollar.

Answer 1

Solution

Geddes Company

Computation of net present value:

Net present value = present value of net cash flows over the useful life of the asset/project – initial investment

Initial investment = $140,000

Since, net cash flows are provided directly in the question, there is no need to separately compute and add depreciation to net income to arrive at net cash flow. The following is the computation of net present value –

Year	PV of $1 at 15%	Net Cash Flow	PV of net cash flow
0	1	($140,000)	($140,000)
1	0.87	$77,000	$66,990
2	0.756	$61,500	$46,494
3	0.658	$48,000	$31,584
4	0.572	$39,000	$22,308
Net Present Value			$27,376

Hence, the net present value of the proposal at 15% rate of return = $27,376