Net Present Value Method
The following data are accumulated by Geddes Company in evaluating the purchase of $139,500 of equipment, having a four-year useful life:
Net Income | Net Cash Flow | |||
Year 1 | $34,000 | $57,000 | ||
Year 2 | 21,000 | 44,000 | ||
Year 3 | 10,000 | 33,000 | ||
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 12%, 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?
No , because the net present value indicates that the return on the
proposal is less than the minimum desired rate of return
of 12%.
Requirement a
Present value of net cash flows | $ 123,490.00 | ||
Amount to be invested | $ 139,500.00 | ||
Net Present Value | $ (16,010.00) |
Working
Year | Net Cash Flow | Present value Discounting factor at 12% | Discounted Cash Flow |
1 | $ 57,000.00 | 0.893 | $ 50,901.00 |
2 | $ 44,000.00 | 0.797 | $ 35,068.00 |
3 | $ 33,000.00 | 0.713 | $ 23,529.00 |
4 | $ 22,000.00 | 0.636 | $ 13,992.00 |
Present value of net cash flows | $ 123,490.00 | ||
Amount to be invested | $ 139,500.00 | ||
Net Present Value | $ (16,010.00) |
The investment is not accepted because the returns are less than 12%
Net Present Value Method The following data are accumulated by Geddes Company in evaluating the purchase of $139,500 of...
Net Present Value Method The following data are accumulated by Geddes Company in evaluating the purchase of $89,500 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...
Net Present Value Method The following data are accumulated by Geddes Company in evaluating the purchase of $206,000 of equipment, having a four-year useful life: Net Income Net Cash Flow Year 1 $44,000 $75,000 Year 2 27,000 58,000 Year 3 13,000 44,000 Year 4 (1,000) 29,000 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...
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Net Present Value Method The following data are accumulated by Geddes Company in evaluating the purchase of $206,000 of equipment, having a four-year useful life: Net Income Net Cash Flow Year 1 $44,000 $75,000 Year 2 27,000 58,000 Year 3 13,000 44,000 Year 4 (1,000) 29,000 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...
Net Present Value Method The following data are accumulated by Geddes Company in evaluating the purchase of $137,200 of equipment, having a four-year useful life: Net Income Net Cash Flow Year 1 $32,000 $54,000 Year 2 20,000 42,000 Year 3 9,000 31,000 Year 4 (1,000) 21,000 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...
Net Present Value Method The following data are accumulated by Geddes Company in evaluating the purchase of $105,000 of equipment, having a four-year useful life: Net Income Net Cash Flow Year 1 $31,000 $52,000 Year 2 19,000 40,000 Year 3 9,000 30,000 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...
Net Present Value Method The following data are accumulated by Geddes Company in evaluating the purchase of $130,600 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...
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