The following data are accumulated by Paxton Company in evaluating the purchase

Question

The following data are accumulated by Paxton Company in evaluating the purchase of $137,900 of equipment, having a four-year useful life:

a. Assuming that the desired rate of return is 6%, 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. If required, use the minus sign to indicate a negative 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 6%.

Net Income Net Cash Flow Year 1 $30,000 $50,000 Year 2 18,000 39,000 Year 3 9,000 29,000 Year 4 (1,000) 20,000

Explanation / Answer

a Present value of net cash flow 122060 =(50000*0.943)+(39000*0.89)+(29000*0.84)+(20000*0.792) Amount to be invested 137900 Net present value -15840 b The net present value indicates that the return on the proposal is less than the minimum desired rate of return of 6%.

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