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

Question

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:

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.

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%.

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     

Explanation / Answer

a Present value of net cash flow 174520 =(80000*0.87)+(65000*0.756)+(50000*0.658)+(40000*0.572) Amount to be invested 150000 Net present value 24520 b The net present value indicates that the return on the proposal is more than the minimum desired rate of return of 15%.

Related Questions

Navigate

• Browse (All)
• Browse N
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.