Net Present Value Method The following data are accumulated by Geddes Company in evaluating the purchase of $105,900 of equipment, having a four-year useful life: Net Income Net Cash Flow Year 1 $32,000 $55,000 Year 2 20,000 42,000 Year 3 32,000 10,000 (1,000) Year 4 21,000 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 15%, 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. Present value of net cash flow $ 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 15%, 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. 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? , because the net present value indicates that the return on the proposal is than the minimum desired rate of return of 15%. Feedback Check My Work a. Multiply the present value of $1 factor for each year (Exhibit 2) 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? b. Consider the time value of money. Learning Objective 3