Net Present Value MethodThe following data are accumulated by Paxton Company inevaluating the purchase...Net...

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Accounting

Net Present Value Method
The following data are accumulated by Paxton Company inevaluating the purchase of $129,200 of equipment, having afour-year useful life:
Net Income Net Cash Flow
Year 1 $38,000 $64,000
Year 2 23,000 49,000
Year 3 11,000 37,000
Year 4 (1,000) 25,000
Present Value of $1 at CompoundInterest
Year 6% 10% 12% 15% 20%
1 0.943 0.909 0.893 0.870 0.833
2 0.890 0.826 0.797 0.756 0.694
3 0.840 0.751 0.712 0.658 0.579
4 0.792 0.683 0.636 0.572 0.482
5 0.747 0.621 0.567 0.497 0.402
6 0.705 0.564 0.507 0.432 0.335
7 0.665 0.513 0.452 0.376 0.279
8 0.627 0.467 0.404 0.327 0.233
9 0.592 0.424 0.361 0.284 0.194
10 0.558 0.386 0.322 0.247 0.162
a. Assuming that the desired rate of return is20%, determine the net present value for the proposal. Use thetable of the present value of $1 presented above. If required,round to the nearest dollar. If required, use the minus sign toindicate a negative net present value.
Present value of net cash flow $
Amount to be invested $
Net present value $
b. Would management be likely to look withfavor on the proposal?
Yes
No

The net present value indicates that the return on the proposal is
greater
less
than the minimum desired rate of return of 20%.

Answer & Explanation Solved by verified expert

4.0 Ratings (669 Votes)

Requirement a

Present value of net cash flows			$ 120,791.00
Amount to be invested			$ 129,200.00
Net Present Value			$ (8,409.00)

Requirement b

The management would not be in favor.

The net present value indicates that the return on the proposal is Less than the minimum desired rate of return of 20%.

Working

Year	Net Cash Flow	Present value Discounting factor at 20%	Discounted Cash Flow
1	$ 64,000.00	0.833	$ 53,312.00
2	$ 49,000.00	0.694	$ 34,006.00
3	$ 37,000.00	0.579	$ 21,423.00
4	$ 25,000.00	0.482	$ 12,050.00

Present value of net cash flows			$ 120,791.00
Amount to be invested			$ 129,200.00
Net Present Value			$ (8,409.00)

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Transcribed Image Text

In: AccountingNet Present Value MethodThe following data are accumulated by Paxton Company inevaluating the purchase...Net Present Value MethodThe following data are accumulated by Paxton Company inevaluating the purchase of $129,200 of equipment, having afour-year useful life:Net IncomeNet Cash FlowYear 1$38,000$64,000Year 223,00049,000Year 311,00037,000Year 4(1,000)25,000Present Value of $1 at CompoundInterestYear6%10%12%15%20%10.9430.9090.8930.8700.83320.8900.8260.7970.7560.69430.8400.7510.7120.6580.57940.7920.6830.6360.5720.48250.7470.6210.5670.4970.40260.7050.5640.5070.4320.33570.6650.5130.4520.3760.27980.6270.4670.4040.3270.23390.5920.4240.3610.2840.194100.5580.3860.3220.2470.162a. Assuming that the desired rate of return is20%, determine the net present value for the proposal. Use thetable of the present value of $1 presented above. If required,round to the nearest dollar. If required, use the minus sign toindicate a negative net present value.Present value of net cash flow$Amount to be invested$Net present value$b. Would management be likely to look withfavor on the proposal?YesNoThe net present value indicates that the return on the proposal isgreaterlessthan the minimum desired rate of return of 20%.

	Net Income	Net Cash Flow
Year 1	$38,000	$64,000
Year 2	23,000	49,000
Year 3	11,000	37,000
Year 4	(1,000)	25,000

Present Value of $1 at CompoundInterest
Year	6%	10%	12%	15%	20%
1	0.943	0.909	0.893	0.870	0.833
2	0.890	0.826	0.797	0.756	0.694
3	0.840	0.751	0.712	0.658	0.579
4	0.792	0.683	0.636	0.572	0.482
5	0.747	0.621	0.567	0.497	0.402
6	0.705	0.564	0.507	0.432	0.335
7	0.665	0.513	0.452	0.376	0.279
8	0.627	0.467	0.404	0.327	0.233
9	0.592	0.424	0.361	0.284	0.194
10	0.558	0.386	0.322	0.247	0.162

Present value of net cash flow	$
Amount to be invested	$
Net present value	$