3. Net Present Value Method

Net Present Value Method The following data are accumulated by Geddes Company in evaluating the purchase of $124,800 of equipment, having a four-year useful life: Net Income Net Cash Flow Year 1 $32,000 $55,000 Year 2 20,000 42,000 Year 3 10,000 32,000 Year 4 (1,000) 21,000 Present Value of $1 at Compound Interest Year 6% 104 12 1590 20% 1 0.943 0.909 0.893 0.870 0.833 2 0.890 0.79% 0.756 0.694 3 0.840 0.792 0.826 0.751 0.683 0.712 0.636 0.650 0.572 0.579 0.482 5 0.747 0,621 0.567 0.497 0.402 5 0.705 0.561 0.507 0.432 0.335 2 0.665 0.452 0.376 0.279 0.513 0.467 8 0.627 0.404 0.327 0.233 9 0.424 0.363 0.284 0.194 0.592 0.550 10 0.336 0.322 0.247 0.162 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 6%, 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 of return of 69 than the minimum desired rate