Question

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%.

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