The following data are accumulated by Bannister Company in evaluating the purchase of $48,500 of equipment, having a four-year useful life:

The following data are accumulated by Bannister Company in evaluating the purchase of $48,500 of equipment, having a four-year useful life:

    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%.