The following data are accumulated by Paxton Company in evaluating the purchase

Question

The following data are accumulated by Paxton Company in evaluating the purchase of $133,600 of equipment, having a four-year useful life:

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.

b. Would management be likely to look with favor on the proposal? yes or no

The net present value indicates that the return on the proposal is (greater or less) than the minimum desired rate of return of 20%.

Net Income Net Cash Flow Year 1 $39,000 $66,000 Year 2 24,000 51,000 Year 3 11,000 38,000 Year 4 (1,000) 26,000

Explanation / Answer

Question - a

Question - b

NO

LESS

When the NPV of the project is negative, management cannot go in favor of the project. A negative NPV at 20% discount rate indicates that retrun on the proposal is less than the minimum desired rate

Year CIF DF PV 1 66000 0.833 54978 2 51000 0.694 35394 3 38000 0.579 22002 4 26000 0.402 10452 Present value of net cashflow 122826 Amount to be invested       133600 Net present value -10774

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