Question

Net Present Value Method

The following data are accumulated by Geddes Company in evaluating the purchase of $111,700 of equipment, having a four-year useful life:

Net Income |
Net Cash Flow |
|||

Year 1 | $28,000 | $48,000 | ||

Year 2 | 17,000 | 37,000 | ||

Year 3 | 8,000 | 28,000 | ||

Year 4 | (1,000) | 19,000 |

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?

, because the net present value indicates that the return on the
proposal is than the minimum desired rate of
return of 12%.

Answer #1

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
$43,000
$73,000
Year 2
26,000
56,000
Year 3
13,000
42,000
Year 4
(1,000)
28,000
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...

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...

Net Present Value Method
The following data are accumulated by Geddes Company in
evaluating the purchase of $188,100 of equipment, having a
four-year useful life:
Net Income
Net Cash Flow
Year 1
$44,000
$74,000
Year 2
27,000
57,000
Year 3
13,000
43,000
Year 4
(1,000)
29,000
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...

Net Present Value Method
The following data are accumulated by Geddes Company in
evaluating the purchase of $82,600 of equipment, having a four-year
useful life:
Net Income
Net Cash Flow
Year 1
$31,000
$53,000
Year 2
19,000
41,000
Year 3
9,000
31,000
Year 4
(1,000)
21,000
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...

Net Present Value Method
The following data are accumulated by Reynolds Company in
evaluating the purchase of $121,300 of equipment, having a
four-year useful life:
Net Income
Net Cash Flow
Year 1
$42,000
$72,000
Year 2
26,000
55,000
Year 3
13,000
42,000
Year 4
(1,000)
28,000
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...

The following data are accumulated by Geddes Company in
evaluating the purchase of $109,100 of equipment, having a
four-year useful life:
Net Income
Net Cash Flow
Year 1
$30,000
$51,000
Year 2
18,000
39,000
Year 3
9,000
30,000
Year 4
(1,000)
20,000
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...

Net Present Value Method
The following data are accumulated by Paxton Company in
evaluating the purchase of $143,500 of equipment, having a
four-year useful life:
Net Income
Net Cash Flow
Year 1
$40,000
$67,000
Year 2
24,000
52,000
Year 3
12,000
39,000
Year 4
(1,000)
26,000
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...

Net Present Value Method
The following data are accumulated by Paxton Company in
evaluating the purchase of $120,500 of equipment, having a
four-year useful life:
Net Income
Net Cash Flow
Year 1
$31,000
$52,000
Year 2
19,000
40,000
Year 3
9,000
30,000
Year 4
(1,000)
20,000
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...

Net Present Value Method
The following data are accumulated by Paxton Company in
evaluating the purchase of $102,900 of equipment, having a
four-year useful life:
Net Income
Net Cash Flow
Year 1
$33,000
$56,000
Year 2
20,000
43,000
Year 3
10,000
32,000
Year 4
(1,000)
22,000
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...

Net Present Value Method
The following data are accumulated by Paxton Company in
evaluating the purchase of $125,000 of equipment, having a
four-year useful life: Net Income Net Cash Flow Year 1 $40,000
$68,000 Year 2 24,000 52,000 Year 3 12,000 39,000 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...

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