Question

Net Present Value Method

The following data are accumulated by Paxton Company in evaluating the purchase of $98,100 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 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%.

Answer 1

a	Calculation of the Net Present Value based on the rate of return 10 %
	Calculations
	Yr	0	1	2	3	4
	Amount to be invested	($98,100)
	Net Cash Flow		$53,000	$41,000	$31,000	$21,000
	P.V Factor @10%	1	0.909	0.826	0.751	0.683
	from Table
	P.V of Cash Flows	($98,100)	$48,177	$33,866	$23,281	$14,343
	N.P.V	$21,567
	Present Value of Net Cash Flow	$119,667
	Amount to be Invested	($98,100)
	Net Present Value	$21,567
b	Yes the management would be likely to look with favor on the proposal as the net present value is positive
	The net present value indicates that the return on the proposal is more than the minimum desired rate
	of return of 10%