Question

Net Present Value Method The following data are accumulated by Paxton Company in evaluating the purchase of $134,100 of equipment, having a four-year useful life: Net Income Net Cash Flow Year 1 $36,000 $61,000 Year 2 22,000 47,000 Year 3 11,000 35,000 Year 4 (1,000) 24,000 Present Value of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.9430 .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 0.747 0.621 0.567 0.497 0.402 0.507 0.432 0.335 0.452 0.376 0.279 0.705 0.665 0.627 0.592 0.564 0.513 0.467 0.424 0.386 0.404 0.361 0.322 0.327 0.284 0.247 0.233 0.194 0.162 0.558 a. Assuming that the desired rate of return is 15%, determine the net present value for the proposal. Use the table of the present value of $1 presented above. If required, round to the nearest dollar. If required, use the minus sign to indicate a negative net present value Present value of net cash flow Amount to be invested Net present value b. Would management be likely to look with favor on the proposal? The net present value indicates that the return on the proposal is than the minimum desired rate of return of 15%.

Answer 1

Solution: Year cash flow PV Factor PV c=a*b 1 61000 0.87 53070 2 47000 0.756 35532 3 35000 0.658 23030 4 24000 0.572 13728 PV of net cash flow 125360 Amount to be invested 134100 NPV -8740 b) No. (as NPV is negative) The NPV indicates that the return on the proposal is less than than the minimum desired rate of return of 15%.