Present Value Method The following data are accumulated by Paxton Company in eva
ID: 2437477 • Letter: P
Question
Present Value Method The following data are accumulated by Paxton Company in evaluating the having a four-year useful life: purchase of $171,300 of equipment, Net Income Net Cash Flow Year 1 $39,000 Year 2 24,000 Year 3 11,000 Year 4 (1,000) $66,000 51,000 38,000 26,000 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 the desired rate of return is 6%, determine the net present value for the proposal. Use the table doliar. If required, use the minus sign a. Assuming that of the present value of $1 presented above. If required, round to the nearest to indicate a negative net present value. 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? than the minimum desired The net present value indicates that the return on the proposal is rate of return of 6%. 2 more Check My Work uses remainingExplanation / Answer
a) Present value of net cash flows at the desired rate of return (i.e. %) is calculated as follows:-
PV of Net Cash Flows = ($66,000*0.943)+($51,000*0.890)+($38,000*0.840)+($26,000*0.792)
= $62,238+$45,390+$31,920+$20,592 = $160,140
Amount to be invested = $171,300
Net Present Value = PV of Net Cash Flows - Amount to be invested
= $161,140 - $171,300 = -$10,160
The net present value is negative (i.e. -$10,160).
b) No, the net present value indicates that the return on the proposal is less than the minimum desired rate of return of 6%.