Net present value method The following data are accumulated by Geddes Company in evaluating the purchase of $150,000 of equipment, having a four-year useful life: Net Income Net Cash Flow Year 1 $42,500 $80,000 Year 2 27,500 65,000 Year 3 12,500 50,000 Year 4 2,500 40,000 A. Assuming that the desired rate of return is 15%, determine the net present value for the proposal. Use the table of the present value of $1 appearing in Exhibit 2 of this chapter. B. Would management be likely to look with favor on the proposal? Explain.
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Solutions
Net present value method
The following data are accumulated by Geddes Company in evaluating the purchase of $150,000 of equipment, having a four-year useful life:
| Net Income | Net Cash Flow | |
| Year 1 | $42,500 | $80,000 |
| Year 2 | 27,500 | 65,000 |
| Year 3 | 12,500 | 50,000 |
| Year 4 | 2,500 | 40,000 |
A. Assuming that the desired rate of return is 15%, determine the net present value for the proposal. Use the table of the present value of $1 appearing in Exhibit 2 of this chapter.
B. Would management be likely to look with favor on the proposal? Explain.
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