Question

Net Present Value Method

The following data are accumulated by Geddes Company in evaluating the purchase of $102,900 of equipment, having a four-year useful life:

	Net Income		Net Cash Flow
Year 1	$33,000		$56,000
Year 2	20,000		43,000
Year 3	10,000		32,000
Year 4	(1,000)		22,000

Present Value of $1 at Compound Interest
Year	6%	10%	12%	15%	20%
1	0.943	0.909	0.893	0.870	0.833
2	0.890	0.826	0.797	0.756	0.694
3	0.840	0.751	0.712	0.658	0.579
4	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
7	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

a. Assuming that the desired rate of return is 10%, 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.

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?
, because the net present value indicates that the return on the proposal is   than the minimum desired rate of return of 10%.

Answer 1

1) present value of net cash flow
Years	Cash flow	PVF@10%	Present value flow
1	56000	0.909	50904
2	43000	0.826	35518
3	32000	0.751	24032
4	22000	0.683	15026
present value of cash flow			125480
amount to be invested			102900
net present value = present value of cash flow-initial investment
net present value = 125480-102900 = 22580
b) project should accepted
because the net present value indicate that the return in proposal
is more than the desired rate of return of 10%

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