Net Present Value Method The following data are accumulated by Paxton Company in evaluating the purchase of $129,100 of equipment, having a four-year useful life:   Net Income Net Cash Flow Year 1 $41,000   $70,000   Year 2 25,000   54,000   Year 3 12,000   41,000   Year 4 (1,000)   27,000   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? yes or no? The net present value indicates that the return on the proposal is  ____________ than the minimum desired rate of return of 10%.

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Chapter1: Financial Statements And Business Decisions
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Net Present Value Method

The following data are accumulated by Paxton Company in evaluating the purchase of $129,100 of equipment, having a four-year useful life:

  Net Income Net Cash Flow
Year 1 $41,000   $70,000  
Year 2 25,000   54,000  
Year 3 12,000   41,000  
Year 4 (1,000)   27,000  
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?

yes or no?

The net present value indicates that the return on the proposal

is  ____________ than the minimum desired rate of return of 10%.

 

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