Question

Net Present Value Method The following data are accumulated by Paxton Company in evaluating the purchase of $106,400 of equipment, having a four-year useful life: Net Income Net Cash Flow Year 1 Year 2 Year 3 Year 4 $35,000 $60,000 22,000 46,000 11,000 35,000 (1,000) 23,000 Present Value of $1 at Compound Interest 6% 10% 12% 15% 20% 0.943 0.9090.893 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 0.705 0.564 0.507 0.432 0.335 0.665 0.513 0.452 0.376 0.279 0.627 0.467 0.404 0.327 0.233 0.592 0.424 0.361 0.284 0.194 0 .558 0.386 0.322 0.247 0.162 10

Answer 1

a
Present value of net cash flow	129790
Amount to be invested	106400
Net Present value	23390

b

Yes, the management would favor on the proposal

The net present value indicates that the return on the proposal is greater than the minimum desired rate of return of 12%

Workings:
Year	Net cash flow	PV factor 12%	Present value
1	60000	0.893	53580
2	46000	0.797	36662
3	35000	0.712	24920
4	23000	0.636	14628
		Total	129790