Net Present Value Method The following data are accumulated by Paxton Company in evaluating the purchase of $129,800 of equipment, having a four-year useful life: Net Income Net Cash Flow Year 1 $40,000 $67,000 Year 2 24,000 52,000 12,000 39,000 Year 3 Year 4 26,000 (1,000) Present Value of $1 at Compound Interest Year 6% 10% 12% 15% 20% 0.943 0.909 0.893 0.870 0.833 0.890 0.826 0.797 0.756 0.694 0.658 0.840 0.751 0.712 0.579 0.792 0.683 0.636 0.572 0.482 0.747 0.621 0.567 0.497 0.402 0.705 0.564 0.507 0.432 0.335 0.665 0.513 0.452 0.376 0.279 0.627 0.467 0.404 0.327 0.233 0.361 0.592 0.424 0.284 0.194 10 0.558 0.386 0.322 0.247 0.162 1. 0.943 0.909 0.893 0.870 0.833 0.890 0.756 0.826 0.797 0.694 0.751 0.840 0.712 0.658 0.579 0.792 4 0.683 0.636 0.572 0.482 0.747 0.621 0.567 0.497 0.402 0.705 0.432 0.564 0.507 0.335 0.665 0.513 0.452 0.376 0.279 0.627 0.467 0.404 0.327 0.233 0.592 0.361 0.284 0.424 0.194 10 0.558 0.386 0.322 0.247 0.162 a. Assuming that the desired rate of return is 15%, 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 15%.
Net Present Value Method The following data are accumulated by Paxton Company in evaluating the purchase of $129,800 of equipment, having a four-year useful life: Net Income Net Cash Flow Year 1 $40,000 $67,000 Year 2 24,000 52,000 12,000 39,000 Year 3 Year 4 26,000 (1,000) Present Value of $1 at Compound Interest Year 6% 10% 12% 15% 20% 0.943 0.909 0.893 0.870 0.833 0.890 0.826 0.797 0.756 0.694 0.658 0.840 0.751 0.712 0.579 0.792 0.683 0.636 0.572 0.482 0.747 0.621 0.567 0.497 0.402 0.705 0.564 0.507 0.432 0.335 0.665 0.513 0.452 0.376 0.279 0.627 0.467 0.404 0.327 0.233 0.361 0.592 0.424 0.284 0.194 10 0.558 0.386 0.322 0.247 0.162 1. 0.943 0.909 0.893 0.870 0.833 0.890 0.756 0.826 0.797 0.694 0.751 0.840 0.712 0.658 0.579 0.792 4 0.683 0.636 0.572 0.482 0.747 0.621 0.567 0.497 0.402 0.705 0.432 0.564 0.507 0.335 0.665 0.513 0.452 0.376 0.279 0.627 0.467 0.404 0.327 0.233 0.592 0.361 0.284 0.424 0.194 10 0.558 0.386 0.322 0.247 0.162 a. Assuming that the desired rate of return is 15%, 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 15%.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Net Present Value Method
The following data are accumulated by Paxton Company in evaluating the purchase of $129,800 of equipment, having a four-year useful life:
Net Income
Net Cash Flow
Year 1
$40,000
$67,000
Year 2
24,000
52,000
12,000
39,000
Year 3
Year 4
26,000
(1,000)
Present Value of $1 at Compound Interest
Year
6%
10%
12%
15%
20%
0.943
0.909
0.893
0.870
0.833
0.890
0.826
0.797
0.756
0.694
0.658
0.840
0.751
0.712
0.579
0.792
0.683
0.636
0.572
0.482
0.747
0.621
0.567
0.497
0.402
0.705
0.564
0.507
0.432
0.335
0.665
0.513
0.452
0.376
0.279
0.627
0.467
0.404
0.327
0.233
0.361
0.592
0.424
0.284
0.194
10
0.558
0.386
0.322
0.247
0.162
Transcribed Image Text:1.
0.943
0.909
0.893
0.870
0.833
0.890
0.756
0.826
0.797
0.694
0.751
0.840
0.712
0.658
0.579
0.792
4
0.683
0.636
0.572
0.482
0.747
0.621
0.567
0.497
0.402
0.705
0.432
0.564
0.507
0.335
0.665
0.513
0.452
0.376
0.279
0.627
0.467
0.404
0.327
0.233
0.592
0.361
0.284
0.424
0.194
10
0.558
0.386
0.322
0.247
0.162
a. Assuming that the desired rate of return is 15%, 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 15%.
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