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Net Present Value Method The following data are accumulated by Geddes Company in evaluating the purchase of 150 000 of equipment having a four year useful life Year 1 Year 2 Year 3 Year 4 Year 1 2 3 4 5 6 7 8 9 10 Net Income 42 500 27 500 12 500 2 500 Present Value of 1 at Compound Interest 6 10 12 15 0 943 0 909 0 893 0 870 0 890 0 826 0 797 0 756 0 840 0 751 0 712 0 658 0 792 0 683 0 636 0 572 0 747 0 621 0 567 0 497 0 705 0 564 0 507 0 432 0 665 0 376 0 627 0 467 0 327 0 592 0 424 0 361 0 284 0 558 0 386 0 322 0 247 0 162 Net present value 0 513 Present value of net cash flow Amount to be invested Feedback 0 452 Net Cash Flow 0 404 80 000 65 000 50 000 40 000 a Assuming that the desired rate of return is 15 determine the net present value for the proposal If required round to the nearest dollar Use the table of the present value of 1 presented above 20 0 833 0 694 0 579 0 482 0 402 0 335 0 279 0 233 0 194 24 520 b Would management be likely to look with favor on the proposal Yes because the net present value indicates that the return on the proposal is greater than the minimum desired rate of return of 15 Check My Work a Multiply the present value of 1 factor for each year Refer Exhibit 2 in the text by that year s net cash flow Subtract the amount to be invested from the total present value of the net cash flow Will management be more favorable to a positive net present value or a negative net present value

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