Net Present Value Method The following data are accumulated by Dillon Company in
ID: 2456211 • Letter: N
Question
Net Present Value Method
The following data are accumulated by Dillon Company in evaluating the purchase of $39,600 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 $ 4,100 $14,000 Year 2 8,100 18,000 Year 3 7,100 17,000 Year 4 2,100 12,000Explanation / Answer
Computation of Net present value
Years Cash inflows Discount @ 15% Pv cash flows
1 14000 0.870 12180
2 18000 0.756 13608
3 17000 0.658 11186
4 12000 0.572 6864
Total PV cash flows 43838
less: initial investment (39600)
NPV 4238.
b. the project is accepted because poitive NPV.