Question

Net Present Value Method

The following data are accumulated by Paxton Company in evaluating the purchase of $143,500 of equipment, having a four-year useful life:

Net Income |
Net Cash Flow |
|||

Year 1 | $40,000 | $67,000 | ||

Year 2 | 24,000 | 52,000 | ||

Year 3 | 12,000 | 39,000 | ||

Year 4 | (1,000) | 26,000 |

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?

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

Answer #1

**working note : Calculation of Present value of net cash
flow**

Year | Net Cash Flow |
PV factor @ 20 % | Present value of net cash
flow |
---|---|---|---|

1 | 67,000 | 0.833 | 55,811 |

2 | 52,000 | 0.694 | 36,088 |

3 | 39,000 | 0.579 | 22,581 |

4 | 26,000 | 0.482 | 12,532 |

Present value of net cash
flow |
$127,012 |

**Answer a**

Present value of net cash flow | $127,012 |

Amount to be invested | - $143,500 |

Net present value |
- $16,488 |

**Answer b.**

**No,** management won't accept the proposal since
the net present value is negative

Net Present Value Method
The following data are accumulated by Paxton Company in
evaluating the purchase of $120,500 of equipment, having a
four-year useful life:
Net Income
Net Cash Flow
Year 1
$31,000
$52,000
Year 2
19,000
40,000
Year 3
9,000
30,000
Year 4
(1,000)
20,000
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...

Net Present Value Method
The following data are accumulated by Paxton Company in
evaluating the purchase of $102,900 of equipment, having a
four-year useful life:
Net Income
Net Cash Flow
Year 1
$33,000
$56,000
Year 2
20,000
43,000
Year 3
10,000
32,000
Year 4
(1,000)
22,000
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...

Net Present Value Method
The following data are accumulated by Paxton Company in
evaluating the purchase of $125,000 of equipment, having a
four-year useful life: Net Income Net Cash Flow Year 1 $40,000
$68,000 Year 2 24,000 52,000 Year 3 12,000 39,000 Year 4 (1,000)
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...

The following data are accumulated by Paxton Company in
evaluating the purchase of $199,000 of equipment, having a
four-year useful life:
Net Income
Net Cash Flow
Year 1
$43,000
$73,000
Year 2
26,000
56,000
Year 3
13,000
42,000
Year 4
(1,000)
28,000
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...

The following data are accumulated by Paxton Company in
evaluating the purchase of $142,800 of equipment, having a
four-year useful life:
Net Income
Net Cash Flow
Year 1
$41,000
$70,000
Year 2
25,000
54,000
Year 3
12,000
41,000
Year 4
(1,000)
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...

The following data are accumulated by Paxton Company in
evaluating the purchase of $136,300 of equipment, having a
four-year useful life: Net Income Net Cash Flow Year 1 $35,000
$59,000 Year 2 21,000 45,000 Year 3 10,000 34,000 Year 4 (1,000)
23,000 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...

Net Present Value Method
The following data are accumulated by Reynolds Company in
evaluating the purchase of $121,300 of equipment, having a
four-year useful life:
Net Income
Net Cash Flow
Year 1
$42,000
$72,000
Year 2
26,000
55,000
Year 3
13,000
42,000
Year 4
(1,000)
28,000
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...

Net Present Value Method
The following data are accumulated by Geddes Company in
evaluating the purchase of $123,300 of equipment, having a
four-year useful life:
Net Income
Net Cash Flow
Year 1
$34,000
$58,000
Year 2
21,000
45,000
Year 3
10,000
34,000
Year 4
(1,000)
23,000
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...

Net Present Value Method
The following data are accumulated by Geddes Company in
evaluating the purchase of $82,600 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...

Net Present Value Method
The following data are accumulated by Geddes Company in
evaluating the purchase of $188,100 of equipment, having a
four-year useful life:
Net Income
Net Cash Flow
Year 1
$44,000
$74,000
Year 2
27,000
57,000
Year 3
13,000
43,000
Year 4
(1,000)
29,000
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...

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