Question

Net present value method The following data are accumulated by Geddes Company in evaluating the purchase of $160,000 of equipment, having a four-year useful life: Net Income Net Cash Flow Year 1 $43,500 $83,500 Year 2 23,000 63,000 Year 3 13,500 53,500 Year 4 6,500 46,500 This information has been collected in the Microsoft Excel Online file. Open the spreadsheet, perform the required analysis, and input your answers in the questions below. Open spreadsheet Assuming that the desired rate of return is 12%, determine the net present value for the proposal. If required, round to the nearest dollar. Net present value $ 86,500 Would management be likely to look with favor on the proposal

Answer 1

A.$32,396

B. Yes

Step-by-step explanation

A. Calculation to determine the net present value for the proposal

Year Net Cash Flow Present value Discounting factor at 12% Discounted Cash Flow

1 $ 83,500.00 0.893 $ 74,565.50

2 $63,000.00 0.797 $ 50,211.00

3 $ 53,500.00 0.713 $ 38,145.50

4 $ 46,500.00 0.636 $ 29,574.00

Present value of net cash flows $ 192,496.00

Amount to be invested $ 160,000.00

Net Present Value $ 32,496

Net Present Value $ 32,496/Amount to be invested $160,000.00 =0.2031*100

=20.31%

B.Yes the management would likely to look with favor on the proposal because the net present value of 20.31% is higher than the expected rate of return of 12%.