Question

The following data are accumulated by Zadok Company in evaluating the purchase of

$370,000 of equipment, having a four-year useful life:

Net Income Net Cash Flow
Year 1 $67,500 $160,000
Year 2 47,500 140,000
Year 3 (12,500) 80,000
Year 4 (12,500) 80,000

a. Assuming that the desired rate of return is 12%, determine the net present value for the
proposal.

b. Would management be likely to look with favor on the proposal? Explain.

Answer 1

$-7,751.85

The management is not likely to look with favour on the proposal because the NPV is negative. This means that the cost of the project exceeds the present value of cash flows. The project is not profitable.

Step-by-step explanation:

Net present value is the present value of after-tax cash flows from an investment less the amount invested.

NPV can be calculated using a financial calculator

Only projects with a positive NPV should be accepted. A project with a negative NPV should not be chosen because it isn't profitable.

Cash flow in year 0 = $-370,000

Cash flow in year 1 = $160,000

Cash flow in year 2 = $140,000

Cash flow in year 3 = $80,000

Cash flow in year 4 = $80,000

I = 12%

NPV = $-7,751.85

The management is not likely to look with favour on the proposal because the NPV is negative. This means that the cost of the project exceeds the present value of cash flows. The project is not profitable.

To determine NPV using a financial calculator take the following steps:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.

3. Press compute