Net present value method The following data are accumulated by Geddes Company in evaluating the purchase of $150,000 of equipment, having a four- year useful life: Net Cash Flow Year 1 $44,000 $81,500 Year 21 27,500 65,000 Year 3 13,500 51,000 Year 4 4,000 41,500 This information has been collected in the Microsoft Excel Online file. Open the spreadsheet, perform the required analysis, and input your answers in the questions below. X Open spreadsheet Net Income a. Assuming that the desired rate of return is 10%, determine the net present value for the proposal. If required, round to the nearest dollar. Net present value b. Would management be likely to look with favor on the proposal? Yes the net present value indicates that the return on the proposal is greater rate of return of 10%. ✔than the minimum desired

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Knowledge Check A purchase of a backhoe with an 8-year life requires an initial investment of $88,300, has positive cash flows of $10,000 per year, and has an estimated salvage value of $21,700. Indicate the inputs to be entered into the financial calculator keys. What is the return of the investment? (Round internal rate of return to two decimal places (e.g., 52.75%).) Inputs Calculator Keys IRR N 8 -2.143 % ? | PV 88300 i PMT 10000 FV

Net present value method The following data are accumulated by Geddes Company in evaluating the purchase of $150,000 of equipment, having a four-year useful life:   Net Income Net Cash Flow Year 1 $40,000   $77,500   Year 2 30,000   67,500   Year 3 16,500   54,000   Year 4 2,000   39,500   This information has been collected in the Microsoft Excel Online file. Open the spreadsheet, perform the required analysis, and input your answers in the questions below.     Open spreadsheet   Assuming that the desired rate of return is 15%, determine the net present value for the proposal. If required, round to the nearest dollar.   Net present value $   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 15%.

You have been assigned to check the valuation of InfoSystems, a software firm, done by a colleague of you. Infosystems has an expected life 5 years, constant cash flows over this period, and zero salvage value. The income statement of the Infosystems is given as follows: Revenues - Operating Expenses EBIT - Interest expenses Taxable Income - Taxes Net Income Years 1-5 €1,000 €550 €450 €85 €365 €146 €219 Infosystems has no capital expenditures, depreciation or working capital needs, i.e. the earnings are the cash flows to the firm. The cost of capital is 10% i. Estimate the value of Infosystems. ii. Assume that the value derived in (i) is the one also estimated by your colleague. How would you change your calculations if you are given that the cash flows are real cash flows and the cost of capital is the nominal cost of capital. The expected inflation rate is 2% annually. Comment on your answer.

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