Net Present Value Method The following data are accumulated by Reynolds Company
ID: 2499578 • Letter: N
Question
Net Present Value Method
The following data are accumulated by Reynolds Company in evaluating the purchase of $123,700 of equipment, having a four-year useful life:
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.
b. Would management be likely to look with favor on the proposal?
SelectYesNoItem 4
The net present value indicates that the return on the proposal is SelectgreaterlessItem 5 than the minimum desired rate of return of 10%.
Net Income Net Cash Flow Year 1 $40,000 $67,000 Year 2 24,000 52,000 Year 3 12,000 39,000 Year 4 (1,000) 26,000Explanation / Answer
Calculation of Net present value:
Net Cash Flow (CF)
PVF(10%)
PV = CF*PVF
Year 1
$ 67,000.00
0.909
$ 60,903.00
Year 2
$ 52,000.00
0.826
$ 42,952.00
Year 3
$ 39,000.00
0.751
$ 29,289.00
Year 4
$ 26,000.00
0.683
$ 17,758.00
Present value of net cash flow
$ 150,902.00
Less: amount to be invested
$ (123,700.00)
Net present value
$ 27,202.00
Decision:
Yes
Management would be likely to look with favor on the proposal.
The net present value indicates that the return on the proposal is greater than the minimum desired rate of return of 10%.
Calculation of Net present value:
Net Cash Flow (CF)
PVF(10%)
PV = CF*PVF
Year 1
$ 67,000.00
0.909
$ 60,903.00
Year 2
$ 52,000.00
0.826
$ 42,952.00
Year 3
$ 39,000.00
0.751
$ 29,289.00
Year 4
$ 26,000.00
0.683
$ 17,758.00
Present value of net cash flow
$ 150,902.00
Less: amount to be invested
$ (123,700.00)
Net present value
$ 27,202.00
Decision:
Yes
Management would be likely to look with favor on the proposal.
The net present value indicates that the return on the proposal is greater than the minimum desired rate of return of 10%.
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