Question

1. Net Present Value Method

   The following data are accumulated by Paxton Company in evaluating the purchase of $129,200 of equipment, having a four-year useful life:

   	Net Income		Net Cash Flow
   Year 1	$38,000		$64,000
   Year 2	23,000		49,000
   Year 3	11,000		37,000
   Year 4	(1,000)		25,000

   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. 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
   • No
   
   The net present value indicates that the return on the proposal is
   • greater
   • less
   than the minimum desired rate of return of 20%.

Answer 1

Requirement a

Present value of net cash flows			$        120,791.00
Amount to be invested			$        129,200.00
Net Present Value			$          (8,409.00)

Requirement b

No

The management would not be in favor.

The net present value indicates that the return on the proposal is Less than the minimum desired rate of return of 20%.

Working

Year	Net Cash Flow	Present value Discounting factor at 20%	Discounted Cash Flow
1	$ 64,000.00	0.833	$          53,312.00
2	$ 49,000.00	0.694	$          34,006.00
3	$ 37,000.00	0.579	$          21,423.00
4	$ 25,000.00	0.482	$          12,050.00
Present value of net cash flows			$        120,791.00
Amount to be invested			$        129,200.00
Net Present Value			$          (8,409.00)