Question

1. Net Present Value Method

   The following data are accumulated by Geddes Company in evaluating the purchase of $153,200 of equipment, having a four-year useful life:

   	Net Income		Net Cash Flow
   Year 1	$44,000		$75,000
   Year 2	27,000		58,000
   Year 3	13,000		44,000
   Year 4	(1,000)		29,000

   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	$ 182,273
   Amount to be invested	$ -206,000
   Net present value	$

   b. Would management be likely to look with favor on the proposal?
   

   • Yes
   • No
   , because the net present value indicates that the return on the proposal is
   • greater
   • less
   than the minimum desired rate of return of 12%.

   Feedback

   a. Multiply the present value of $1 factor for each year (Exhibit 2) by that year's net cash flow. Subtract the amount to be invested from the total present value of the net cash flow. Will management be more favorable to a positive net present value or a negative net present value?

   b. Consider the time value of money.

   Learning Objective 3.

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Answer 1

1
	Years	Net Cash Flows	PV of 1 at 12%	PV of Net Cash Flows
	1	$                                                  75,000	0.893	$                     66,975
	2	$                                                  58,000	0.797	$                     46,226
	3	$                                                  44,000	0.712	$                     31,328
	4	$                                                  29,000	0.636	$                     18,444
	Totals	$                                               2,06,000		$                  1,62,973
	Amount Invested			$                  1,53,200
	Net Present Value			$                       9,773
2	Yes, Since the NPV is positive, the management will like to move on with the project