Homework SourseNet Present Value Method The following data are accumulated
Net Present Value Method
The following data are accumulated by Reynolds Company in evaluating the purchase of $107,700 of equipment, having a four-year useful life:
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, round to the nearest dollar.
| Net Income | Net Cash Flow | |||
| Year 1 | $31,000 | $53,000 | ||
| Year 2 | 19,000 | 41,000 | ||
| Year 3 | 9,000 | 31,000 | ||
| Year 4 | (1,000) | 21,000 |
Solution
Answer
Net Cash Flow
PV factor at 20%
Present value of net cash flow
[A]
[B –from table]
[C = A x B]
Year 1
$ 53,000.00
0.833
$ 44,149.00
Year 2
$ 41,000.00
0.694
$ 28,454.00
Year 3
$ 31,000.00
0.579
$ 17,949.00
Year 4
$ 21,000.00
0.482
$ 10,122.00
TOTAL
$ 1,46,000.00
$ 1,00,674.00
Present value of net cash flow
$ 100,674
Less: amount to be invested (cost of Equipment)
$ 107,700
Net present value
$ (7,026)
| Net Cash Flow | PV factor at 20% | Present value of net cash flow | |
| [A] | [B –from table] | [C = A x B] | |
| Year 1 | $ 53,000.00 | 0.833 | $ 44,149.00 |
| Year 2 | $ 41,000.00 | 0.694 | $ 28,454.00 |
| Year 3 | $ 31,000.00 | 0.579 | $ 17,949.00 |
| Year 4 | $ 21,000.00 | 0.482 | $ 10,122.00 |
| TOTAL | $ 1,46,000.00 | $ 1,00,674.00 |
