Question

The following data are accumulated by Paxton Company in evaluating the purchase of $142,800 of equipment,...

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 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 12%, 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 12%.

Homework Answers

Answer #1
a
Present value of net cash flow 151912
Amount to be invested 142800
Net present value 9112
b
The net present value indicates that the return on the proposal is greater than the minimum desired rate of return of 12%.
Workings:
Year Net Cash Flow PV factor 12% Present value
1 70000 0.893 62510
2 54000 0.797 43038
3 41000 0.712 29192
4 27000 0.636 17172
Total 151912
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