Net Present Value Method The following data are accumulated by Geddes Company in evaluating the purchase of $118,900 of equipment, having a four-year useful life: Net Income Net Cash Flow Year 1 $34,000 $58,000 Year 2 21,000 45,000 Year 3 10,000 34,000 Year 4 (1,000) 23,000 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 12%, 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. Present value of net cash flow $fill in the blank 1 Amount to be invested $fill in the blank 2 Net present value $fill in the blank 3 b. Would management be likely to look with favor on the proposal? , because the net present value indicates that the return on the proposal is than the minimum desired rate of return of 12%.
Net Present Value Method The following data are accumulated by Geddes Company in evaluating the purchase of $118,900 of equipment, having a four-year useful life: Net Income Net Cash Flow Year 1 $34,000 $58,000 Year 2 21,000 45,000 Year 3 10,000 34,000 Year 4 (1,000) 23,000 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 12%, 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. Present value of net cash flow $fill in the blank 1 Amount to be invested $fill in the blank 2 Net present value $fill in the blank 3 b. Would management be likely to look with favor on the proposal? , because the net present value indicates that the return on the proposal is than the minimum desired rate of return of 12%.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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The following data are accumulated by Geddes Company in evaluating the purchase of $118,900 of equipment, having a four-year useful life:
| Net Income | Net Cash Flow | |||
| Year 1 | $34,000 | $58,000 | ||
| Year 2 | 21,000 | 45,000 | ||
| Year 3 | 10,000 | 34,000 | ||
| Year 4 | (1,000) | 23,000 |
| 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
| Present value of net cash flow | $fill in the blank 1 |
| Amount to be invested | $fill in the blank 2 |
| Net present value | $fill in the blank 3 |
b. Would management be likely to look with favor on the proposal?
, because the net present value indicates that the return on the proposal is than the minimum desired rate of return of 12%.
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