1. 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		$42,500		$80,000
   Year 2		27,500		65,000
   Year 3		12,500		50,000
   Year 4		2,500		40,000

   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 15%, determine the net present value for the proposal. If required, round to the nearest dollar. Use the table of the present value of $1 presented above.

   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? Yes

   • Yes
   • No
   , because the net present value indicates that the return on the proposal is greater
   • greater
   • less
   than the minimum desired rate of return of 15%.

   Feedback

   a. Multiply the present value of $1 factor for each year (Refer Exhibit 2 in the text.) 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.