Net Present Value Method The following data are accumulated by Reynolds Company

Question

Net Present Value Method The following data are accumulated by Reynolds Company in evaluating the purchase of $108,900 of equipment, having a four-year useful life: Net Income $32,000 20,000 10,000 (1,000) Net Cash Flow Year 1 Year 2 Year 3 Year 4 $55,000 42,000 32,000 21,000 Present Value of $1 at Compound Interest Year 690 1090 1290 1590 2090 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 6%, determine the net present value for the proposal. Use the table of the present value of $1 presented above. If required, round to the nearest dollar. Present value of net cash flow$ Less amount to be invested $ Net present value

Explanation / Answer

Year Net Cash flow Discounting factor @6% Discounted Cashflow 1 $ 55,000 0.943 $      51,865 2 $ 42,000 0.890 $      37,380 3 $ 32,000 0.840 $      26,880 4 $ 21,000 0.792 $      16,632 Discounted Cashflow $    132,757 Present value of net cashflow $        132,757 Less : Amount to be invested $        108,900 Net present value $          23,857

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