Net Present Value Method The following data are accumulated by Reynolds Company

Question

Net Present Value Method The following data are accumulated by Reynolds Company in evaluating the purchase of $107,900 of equipment, having a four-year useful life:

Net Cash Flow $51,000 39,000 30,000 20,000 Net Income Year 1 Year 2 Year 3 Year 4 $30,000 18,000 9,000 (1,000) Present Value of $1 at Compound Interest 10% 12% 0.893 0.890 0.826 0.7970.756 0.694 0.840 0.751 0.712 0.658 0.579 0.792 0.683 0.636 0.572 0.482 0.747 0.621 0.567 0.497 0.402 0.705 0.564 0.507 0.432 0.335 0.665 0.513 0.452 0.376 0.279 0.627 0.467 0.404 0.327 0.233 0.592 0.424 0.361 0.284 0.194 0.558 0.386 0.322 0.247 0.162 Year 690 15% 20% 0.943 0.909 0.870 0.833 2 4 6 7 8 10 a. Assuming that the desired rate of return is 10%, 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. Present value of net cash flow Less amount to be invested Net present value b. Would management be likely to look with favor on the proposal? Select The net present value indicates that the return on the proposal is Select than the minimum desired rate of return of 10%

Explanation / Answer

a Calculation of present Value Year Cash Flow Discount Total 1 51000 0.909 46359 2 39000 0.826 32214 3 30000 0.751 22530 4 20000 0.683 13660 Present Value of Net Cash Flow 114763 Less: Amount to be Invested -107900 Net Present Value 6863 b Yes, the project will be accepted as the project is having positive value

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