Question

Net Present Value Method The following data are accumulated by Geddes Company in evaluating the purchase...

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 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 10%, 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 \$

Present value of cash inflows

 Year Cash inflows Present value factor at 10% discounting rate Present value of cash inflows 1 \$ 58000 0.909 \$ 52722 2 \$ 45000 0.826 \$ 37170 3 \$ 34000 0.751 \$ 25534 4 \$ 23000 0.683 \$ 15709 Present value of cash inflows \$ 131135

Desired rate of return is 10%, so it will used as the discounting rate.

Present value of cash inflow = Cash inflow * Discounting factor

The present value of the cash outflow of \$ 123300 occurring in the year zero will be same as that amount, because the present value factor will be one.

Net present value of the proposal

= Present value of cash inflows – Present value of cash outflows (amount to be- invested)

= \$ 131135 - \$ 123300 = \$ 7835

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