| A firm evaluates all of its projects by using the NPV decision rule. |
| Year | Cash Flow | ||
| 0 | –$26,000 | ||
| 1 | 21,000 | ||
| 2 | 15,000 | ||
| 3 | 7,000 | ||
| a. At a required return of 23 percent, what is the NPV for this project? |
| b. At a required return of 36 percent, what is the NPV for this project? |
a.Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)
=21000/1.23+15000/1.23^2+7000/1.23^3
=$30749.59
NPV=Present value of inflows-Present value of outflows
=$30749.59-$26000
=$4749.59(Approx).
b.Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)
=21000/1.36+15000/1.36^2+7000/1.36^3
=$26,333.83
NPV=Present value of inflows-Present value of outflows
=$26,333.83-$26000
=$333.83(Approx).
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