The following data are accumulated by Paxton Company in evaluating the purchase of $82,600 of equipment, having a four-year useful life:   Net Income Net Cash Flow Year 1 $31,000   $53,000   Year 2 19,000   41,000   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 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 20%, 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 20%.

FINANCIAL ACCOUNTING
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Author:Libby
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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 $82,600 of equipment, having a four-year useful life:

  Net Income Net Cash Flow
Year 1 $31,000   $53,000  
Year 2 19,000   41,000  
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 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 20%, 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 20%.

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