Question

Net Present Value Method

The following data are accumulated by Paxton Company in evaluating the purchase of $88,700 of equipment, having a four-year useful life:

	Net Income		Net Cash Flow
Year 1	$28,000		$48,000
Year 2	17,000		37,000
Year 3	8,000		28,000
Year 4	(1,000)		19,000

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. 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 10%.

Answer 1

Answer

• [a]

Present Value of net cash flow	$108,199	(48000*0.909)+(37000*0.826)+(28000*0.751)+(19000*0.683)
Amount to be invested	$88,700
Net Present Value	$19,499

• [b]

YES

The net present value indicates that the return on the proposal is MORE  than the minimum desired rate of return of 10%.