Question

Net Present Value Method

The following data are accumulated by Geddes Company in evaluating the purchase of $161,000 of equipment, having a four-year useful life:

	Net Income		Net Cash Flow
Year 1	$35,000		$59,000
Year 2	21,000		45,000
Year 3	10,000		34,000
Year 4	(1,000)		23,000

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 6%, 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	$

Answer 1

Solution

Present value of net cash flows			$    142,463
Amount to be invested			$    161,000
Net Present value			$    (18,537)

Working

Year	Cash In flows (Outflows)	Discounting factor @6%	Present value
1	$    59,000.00	0.943	$       55,637.00
2	$    45,000.00	0.890	$       40,050.00
3	$    34,000.00	0.840	$       28,560.00
4	$    23,000.00	0.792	$       18,216.00
Present value of net cash flows			$    142,463.00
Amount to be invested			$    161,000.00
Net Present value			$    (18,537.00)