Question

A company considers a venture with the following cash flows; It needs an initial capital outlay of $400,000 and produces cash inflows of $75,000 in year 1, $120,000 in year 2, $120,000 in year 3, $120,000 in year 4 and finally $100,000 in year 5. Which one of the following interest rates would lead to a rejection of the project by the company?

(a) 8% (b) 9% (c) 10% (d) 12%

Answer 1

Year	Cash Flow	At 8%		At 9%		At 10%		At 12%
		PV Factor	PV	PV Factor	PV	PV Factor	PV	PV Factor	PV
1	75000	0.925926	69444.44	0.917431	68807.34	0.909091	68181.82	0.892857	66964.28571
2	120000	0.857339	102880.66	0.841680	101001.60	0.826446	99173.55	0.797194	95663.26531
3	120000	0.793832	95259.87	0.772183	92662.02	0.751315	90157.78	0.711780	85413.62974
4	120000	0.735030	88203.58	0.708425	85011.03	0.683013	81961.61	0.635518	76262.16941
5	100000	0.680583	68058.32	0.649931	64993.14	0.620921	62092.13	0.567427	56742.68557
	PV of Total Cash Inflow		423846.87		412475.12		401566.89		381046.04
	Less : Initial Cash Flow		400000.00		400000.00		400000.00		400000.00
	NPV		23846.87		12475.12		1566.89		-18953.96
	The NPV is Negetive at 12 % , Therefore , at Interest Rate 12 % the Project shall be rejected.