Net Present Value Method The following data are accumulated by Reynolds Company
ID: 2583701 • Letter: N
Question
Net Present Value Method
The following data are accumulated by Reynolds Company in evaluating the purchase of $113,800 of equipment, having a four-year useful life:
a. Assuming that the desired rate of return is 20%, 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.
b. Would management be likely to look with favor on the proposal?
SelectYesNoItem 4
The net present value indicates that the return on the proposal is SelectgreaterlessItem 5 than the minimum desired rate of return of 20%.
Net Income Net Cash Flow Year 1 $31,000 $53,000 Year 2 19,000 41,000 Year 3 9,000 31,000 Year 4 (1,000) 21,000Explanation / Answer
Present value of net cash flow 100674 =(53000*0.833)+(41000*0.694)+(31000*0.579)+(21000*0.482) Less amount to be invested 113800 Net present value -13126 2 No The net present value indicates that the return on the proposal is less than the minimum desired rate of return of 20%