chap 1 Net Present Value Method The following data are accumulated by Geddes Com

Question

chap 1 Net Present Value Method The following data are accumulated by Geddes Company in evaluating the purchase of $154,700 of equipment, having a four-year useful life Net Income Net Cash Flow Year $40,000 Year 2 24,000 Year 3 12,000 Year 4 1,000) $68,000 52,000 39,000 27,000 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 retum is 696, 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 b. Would management be likely to look with favor on the proposal? present value because the net present value indicates that the return on the proposal is than the minimum desired rate of return of 6%.

Explanation / Answer

a.

b. Yes, because the net present value indicates that the return on the proposal is greater than the minimum desired rate of return of 6%.

Year PV Net Cash Flow PV of Net Cash Flow 1 0.943 $68,000 $64,124 2 0.890 $52,000 $46,280 3 0.840 $39,000 $32,760 4 0.792 $27,000 $21,384 Total $164,548

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