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 | 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 20%, 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 | $ |
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 20%.
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