Problem - Net present value method
The following data are accumulated by Reynolds Company in evaluating the purchase of $104,000 of equipment, having a four-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 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
|
Required -
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 presented in the table 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: