Question

The following data are accumulated by Zadok Company in evaluating the purchase of $370,000 of equipment, having a four-year useful life: Net Income Net Cash Flow Year 1 $67,500 $160,000 Year 2 47,500 140,000 Year 3 (12,500) 80,000 Year 4 (12,500) 80,000 a. Assuming that the desired rate of return is 12%, determine the net present value for the proposal. b. Would management be likely to look with favor on the proposal? Explain.

Answer 1

Answer: Management will not look at this investment in equipment favorably, as the net present value of the project is negative, which will decrease shareholder's wealth.

Explanation:

                                    0                   1            2             3              4

Net Cashflows        -370,000     160000      140000 80000 80000

Discount factor  12%    1               0.893 0.797 0.712 0.636

PV of cashflows       -370000     142857 111607 56942  50841

NPV -7752