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?

The net present value indicates that the return on the proposal is than the minimum desired rate of return of 10%.

Answer 1

Requirement a

Present value of all cash inflow					$              119,667
Amount to be invested					$                 98,100
Net Present value					$                 21,567

Requirement b

The manager will be likely ti look in favor of proposal because

The net present value indicates that the return on the proposal is more than the minimum desired rate of return of 10%.

Working

Year	Net cash inflows			Discounting factor	Discounted cash flow
1	$           53,000.00			0.909	$                 48,177
2	$           41,000.00			0.826	$                 33,866
3	$           31,000.00			0.751	$                 23,281
4	$           21,000.00			0.683	$                 14,343
Present value of all cash inflow					$              119,667
Amount to be invested					$                 98,100
Net Present value					$                 21,567