Net Income | Net Cash Flow
Year 1 $ 6,875 | $19,000
Year 2 10,875 | 23,000
Year 3 7,875 | 20,000
Year 4 2,875 | 15,000
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 appearing in Exhibit 1 of this chapter.
b. Would management be likely to look with favor on the proposal?Explain.
Answer:
Present Value
of $1 at 15%
Net Cash
Flow
1 0.870
$19,000 $16,530
2 0.756
3 0.658
23,000
20,000
4 0.572 15,000 8,580
Total………………………………………… $77,000 $55,658
Less amount to be invested…………… 48,500
Net present value………………………… $ 7,158
b. Yes. The $7,158 net present value indicates that the return on the proposal is
greater than the minimum desired rate of return of 15%.
