Question

Net Present Value Method The following data are accumulated by Geddes Company in evaluating the purchase of $97,400 of equipment, having a four-year useful life: Net Income Net Cash Flow Year 1 $32,000 $55,000 Year 2 20,000 42,000 Year 3 10,000 32,000 Year 4 (1,000) 21,000 Present Value of $1 at Compound Interest Year 6% 10% 12% 15% 20% 0.943 0.909 0.893 0.870 0.833 0.890 0.826 0.797 0.756 0.694 0.840 0.751 0.712 0.658 0.579 0.792 0.683 0.636 0.572 0.482 5 0.747 0.621 0.567 0.497 0.402 6 0.705 0.564 0.507 0.432 0.335 0.665 0.513 0.452 0.376 0.279 8 0.627 0.467 0.404 0.327 0.233 9 0.592 0.424 0.361 0.284 0.194 10 0 .558 0.386 0.322 0.247 0.162

Answer 1

Ans. 1	Year	Cash inflows	PV @ 12%	Present value of cash inflows
	1	$55,000	0.893	$49,115
	2	$42,000	0.797	$33,474
	3	$32,000	0.712	$22,784
	4	$21,000	0.636	$13,356
	Total Present value of cash inflows			$118,729
	Present value of cash inflows		$118,729
	Less: Investment		-$97,400
	Net present value		$21,329
Ans. 2	Expected return on investment = Net present value / Initial investment * 100
		$21,329 / $97,400 * 100
		21.90%
	Management would likely to look with favor on the proposal, because the net present value
	indicates that the return on the proposal is higher than the minimum desired rate of return of 12%.