Exercise 26-7 Net Present Value Due April 11, 11:55 PM EST Exercise 26-7 Net Pre

ID: 2464778 • Letter: E

Question

Exercise 26-7 Net Present Value Due April 11, 11:55 PM EST Exercise 26-7 Net Present Value Method The following data are accumulated by Parker Company in evaluating the purchase of $126,000 of equipment, having a four-year useful life: Year Net Income Net Cash Flow Table Factor Present Value year 1 $ 33,500 $ 65,000 year 2 24,500 56,000 year 3 10,500 42,000 year 4 (6,500) 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 15%, determine the net present value for the proposal. (If required, round to the nearest dollar.) Use the table of the present value of $1 presented above. Present Value of Net Cash Flow: $ Less amount to be invested: $ Net present value: $ b. Would management be likely to look with favor on the proposal and Explain.? Item 12

Explanation / Answer

Calculation of net present value for the proposal:

Year

Net Cash Flows (CF)

PVF (15%)

PV = CF*PVF

$ 65,000

0.870

$ 56,550

$ 56,000

0.756

$ 42,336

$ 42,000

0.658

$ 27,636

$ 25,000

0.572

$ 14,300

Present value of cash flows =

$ 140,822

Less: Amount to be invested

$ (126,000)

Net Present value

$ 14,822

The Net present value of the proposal is Positive and hence the proposal should be accepted