Question

Net Present Value Method

The following data are accumulated by Geddes Company in evaluating the purchase of $101,200 of equipment, having a four-year useful life:

	Net Income		Net Cash Flow
Year 1	$34,000		$57,000
Year 2	21,000		44,000
Year 3	10,000		33,000
Year 4	(1,000)		22,000

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 12%, 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.

Present value of net cash flow
Amount to be invested
Net present value

Answer 1

Present Value of Net Cash Flow	123457
Amoutn to be invested	-101200
Net Present Value	22257

Working Note: Computation of NPV- Geddes Company
Year	Cash Flow	PVf @ 12%	Present Value of Cash Flow
	[a]	[b]	[c = a*b]
0	-101200	1.00000	(101,200.00)
1	57000	0.89300	50,901.00
2	44000	0.79700	35,068.00
3	33000	0.71200	23,496.00
4	22000	0.63600	13,992.00
NPV	22,257.00