Net Present Value Method
The following data are accumulated by Geddes Company in evaluating the purchase of $150,000 of equipment, having a four-year useful life:
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
Present Value of $1 at Compound Interest
Year 6% 10% 12% 15% 20%
1 0.943 0.909 0.893 0.870 0.833
2 0.890 0.826 0.797 0.756 0.694
3 0.840 0.751 0.712 0.658 0.579
4 0.792 0.683 0.636 0.572 0.482
5 0.747 0.621 0.567 0.497 0.402
6 0.705 0.564 0.507 0.432 0.335
7 0.665 0.513 0.452 0.376 0.279
8 0.627 0.467 0.404 0.327 0.233
9 0.592 0.424 0.361 0.284 0.194
10 0.558 0.386 0.322 0.247 0.162
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.
Present value of net cash flow $
Amount to be invested
Net present value $
b. Would management be likely to look with favor on the proposal?
Yes , because the net present value indicates that the return on the proposal is greater than the minimum desired rate of return of 15%.