The following data are accumulated by Paxton Company in evaluating the purchase of $157,200 of equipment, having a four-year useful life: Net Income Net Cash Flow Year 1 $41,000 $69,000 Year 2 25,000 53,000 Year 3 Year 4 12,000 40,000 (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 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 0.705 0.564 0.507 0.432 0.335
The following data are accumulated by Paxton Company in evaluating the purchase of $157,200 of equipment, having a four-year useful life: Net Income Net Cash Flow Year 1 $41,000 $69,000 Year 2 25,000 53,000 Year 3 Year 4 12,000 40,000 (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 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 0.705 0.564 0.507 0.432 0.335
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:The following data are accumulated by Paxton Company in evaluating the purchase of $157,200 of equipment, having a four-year useful life:
Net Income
Net Cash Flow
Year 1
$41,000
$69,000
Year 2
25,000
53,000
Year 3
12,000
40,000
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
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 6%, 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 6%.
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