Question

Net present value method

The following data are accumulated by Geddes Company in evaluating the purchase of $160,000 of equipment, having a four-year useful life:

Net Income Net Cash Flow

Year 1: $42,000 $82,000

Year 2: 22,500 62,500

Year 3: 10,000 50,000

Year 4: 6,000 46,000

This information has been collected in the Microsoft Excel Online file. Open the spreadsheet, perform the required analysis, and input your answers in the questions below.

Open spreadsheet

a) Assuming that the desired rate of return is 12%, determine the net present value for the proposal. If required, round to the nearest dollar.

Net present value $_______

b) Would management be likely to look with favor on the proposal? yes/no , the net present value indicates that the return on the proposal is greater/less than the minimum desired rate of return of 12%.

Answer 1

Year	Cash flow	PV factor @ 12%	Discount cash flow
1	82000	0.893	73226
2	62500	0.797	49813
3	50000	0.712	35600
4	46000	0.636	29256
Total present value of net cash flow			187895
Present value of net cash flow	187895
Less: Amount to be invested	160000
Net present value	27895
b)
Yes, present value indicates that the return on proposal is higher than the minimum desired return of 12%