The following data are accumulated by Reynolds Company in evaluating the purchase of $153,000 of equipment, having a four-year useful life:
Net Income | Net Cash Flow | |
---|---|---|
Year 1 | $40,000 | $67,000 |
Year 2 | 24,000 | 52,000 |
Year 3 | 12,000 | 39,000 |
Year 4 | (1,000) | 26,000 |
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 6%, determine the net present value for the proposal.
b. Would management be likely to look with favor on the proposal?
The net present value indicates that the return on the proposal is _____ than the minimum desired rate of return of 6%.