Question

Net Present Value Method The following data are accumulated by Paxton Company in evaluating the purchase of $119,700 of equipment, having a four-year useful life: Net Income Net Cash Flow Year 1 $38,000 $65,000 Year 2 24,000 50,000 Year 3 11,000 38,000 Year 4 (1,000) 25,000 Present Value of $1 at Compound Interest Year 10% 6% 12% 15% 20% 0.943 0.870 0.833 0.909 0.893 1 0.756 0.694 0.797 0.826 2 0.890 0.658 0.579 0.751 0.712 0.840 0.482 0.572 0.792 0.683 0.636 4 0.402 0.567 0.497 0.621 0.747 0.335 0.432 0.507 0.564 0.705 6 0.279 0.376 0.452 0.513 0.665 7 0.233 0.327 0.404 0.467 0.627 8 0.194 0.284 0.361 0.424 0.592 0.162 0.247 0.322 0.386 0.558 10 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? than the minim um desired rate of return of 10% The net present value indicates that the return on the proposal is

Answer 1

	Net Cash Flow	PV factor at 10 %	Present Value of Cash Inflows
Year 1	$ 65,000	0.909	$ 59,085
Year 2	50,000	0.826	41,300
Year 3	38,000	0.751	28,538
Year 4	25,000	0.683	17,075
			$ 145,998

a.

Present value of net cash flow	$ 145,998
Amount to be invested	119,700
Net present value	$ 26,298

b. Yes.

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