Net Present Value Method
The following data are accumulated by Geddes Company in evaluating the purchase of $123,300 of equipment, having a fouryear 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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