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Net Present Value Method The following data are accumulated by Wocester Hat Company in evaluating...

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Accounting

Net Present Value Method

The following data are accumulated by Wocester Hat Company in evaluating the purchase of $80,400 of equipment, having a four-year useful life:

Net Income (Loss) Net Cash Flows
Year 1 $31,000 $52,000
Year 2 19,000 40,000
Year 3 9,000 30,000
Year 4 (1,000) 20,000

Present Value of $1 at Compound Interest
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 is 20%, determine the net present value for the proposal. Use the table of the present value of $1 presented above. If required, use the minus sign to indicate 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 with favor on the proposal?

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