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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.
Financial & Managerial Accounting
Solutions
Financial & Managerial Accounting
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.
(a)
Net present value method:
Net present value method is the method which is used to compare the initial cash outflow of investment with the present value of its cash inflows. In the net present value, the interest rate is desired by the business based on the net income from the investment, and it is also called as the discounted cash flow method.
To calculate: The net present value of the investment.
Explanation of Solution
The net present value of the project with 15% rate of return is as follows:
(b)
To explain: whether the management would look with favor on the proposal.
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