Question

The following data are accumulated by Reynolds Company in evaluating the purchase of $161,800 of equipment, having a four-year useful life:

	Net Income		Net Cash Flow
Year 1	$39,000		$66,000
Year 2	24,000		51,000
Year 3	11,000		38,000
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	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.

Present value of net cash flow	$
Less 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