Net Present Value Method The following data are accumulated by Geddes Company in

Question

Net Present Value Method The following data are accumulated by Geddes Company in evaluating the purchase of $109,800 of equipment, having a four-year useful life: Net Income Year 1 Year 2 Year 3 Year 4 $28,000 17,000 8,000 (1,000) Net Cash Flow $48,000 37,000 28,000 19,000 Present Value of $1 at Compound Interest 696 0.943 0.890 0.840 0.792 0.747 0.705 0.665 0.627 0.592 0.558 15% 0.870 0.756 0.658 0.572 0.497 0.432 0.376 0.327 0.284 0.247 20% 0.833 0.694 0.579 0.482 0.402 0.335 0.279 0.233 0.194 0.162 Year 10% 0.909 0.826 0.751 0.683 0.621 0.564 0.513 0.467 0.424 0.386 12% 0.893 0.797 0.712 0.636 0.567 0.507 0.452 0.404 0.361 0.322 2 4 8 10

Explanation / Answer

a Present value of net cash flow 116762 =(48000*0.943)+(37000*0.89)+(28000*0.84)+(19000*0.792) Amount to be invested 109800 Net present value 6962 b Yes, because the net present value indicates that return on proposal is greater than minimum desired rate of return of 6%

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