Net Present Value Method The following data are accumulated by Paxton Company in evaluating the purchase of $131,700 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 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 $fill in the blank Amount to be invested $fill in the blank Net present value $fill in the blank 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%.

Survey of Accounting (Accounting I)

8th Edition

ISBN:9781305961883

Author:Carl Warren

Publisher:Carl Warren

Chapter7: Fixed Assets, Natural Resources, And Intangible Assets

Section: Chapter Questions

Problem 7.3.3MBA

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Net Present Value Method

The following data are accumulated by Paxton Company in evaluating the purchase of $131,700 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	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	$fill in the blank
Amount to be invested	$fill in the blank
Net present value	$fill in the blank

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%.

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