Net Present Value Method

The following data are accumulated by Paxton 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? The net present value indicates that the return on the proposal is than the minimum desired rate of return of 15%.