Question

The following data are accumulated by Paxton Company in evaluating the purchase of $100,100 of equipment, having a four-year useful life:

	Net Income		Net Cash Flow
Year 1	$30,000		$50,000
Year 2	18,000		39,000
Year 3	9,000		29,000
Year 4	(1,000)		20,000

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. 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 6%.

Answer 1

NET PRESENT VALUE Equipment Year Table Value @ 6% PVCF =CF*PV Cash Flows Factor 1 0.943 50000 47150 2 0.890 39000 347101 3 0.840 29000 24360 0.792 20000 15840 Total Present value of Cash flows (TPVCF) 122060 Net Present Value = TPVCF -InvestmentRequired Present Value of Net cashflows Less: Amount to be invested Net present Value Would management be likely to look with favor on the proposal 122060 100100 21960 YES The Net Present Value indicates that the retunr on the proposal is More then the Minimum desired Rate of Return 6%