Question

Net Present Value Method

The following data are accumulated by Reynolds Company in evaluating the purchase of $107,700 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.

Present value of net cash flow	$
Less amount to be invested	$
Net present value	$

Answer 1

• All working forms part of the answer
• Working:

	Net Cash Flow	PV factor at 20%	Present value of net cash flow
	[A]	[B –from table]	[C = A x B]
Year 1	$                 53,000.00	0.833	$          44,149.00
Year 2	$                 41,000.00	0.694	$          28,454.00
Year 3	$                 31,000.00	0.579	$          17,949.00
Year 4	$                 21,000.00	0.482	$          10,122.00
TOTAL	$             1,46,000.00		$       1,00,674.00

• Answer

Present value of net cash flow	$ 100,674
Less: amount to be invested (cost of Equipment)	$ 107,700
Net present value	$ (7,026)