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