Net Present Value Method The following data are accumulated by Paxton Company in evaluating the purchase of $133,600 of equipment, having a four-year useful life: Net Income Net Cash Flow Year $44,000 $75,000 Year 2 27,000 58,000 Year 3 13,000 44,000 Year 4 (1,000) 29,000 Present Value of $1 at Compound Interest Year 69 10% 12% 15% 20% 1 0.909 0.893 0.870 0.833 0.943 0.890 2 0.826 0.797 0.56 0.694 3 0.840 0.712 0.658 0.579 0.751 0.683 4 0.792 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 0.375 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 0.556 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 162,000 X 0.840 0.751 0.712 0.658 0.579 4 0.792 0.683 0.636 0.572 0.482 S 0.747 0.621 0.567 0.497 0.402 0.705 6 0.507 0.432 0.335 0.564 0.513 0.665 7 0.452 0.376 0.279 8 0.627 0.467 0.404 0.322 0.233 0.592 9 0.424 0.284 0.194 0.361 0.322 10 0.558 0.386 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 162,000 X Amount to be invested -133,600 Net present value 28,400 X 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 than the minimum desired rate of return of 12% Check My Work a. Multiply the present value of $1 factor for each year by that year's net cash flow. Subtract the amount to be invested from the total present value of the net cash flow. Will management be more favorable to a positive net present value or a negative net present value? b. Consider the time value of money