Net present value. Quark Industries has a project with the following projected cash flows: Initial cost: $200,000 Cash flow year one: $23,000 Cash flow year two: $72,000 Cash flow year three: $157,000 Cash flow year four: $157,000 a. Using a discount rate of 10% for this project and the NPV model, determine whether the company should accept or reject this project. b. Should the company accept or reject it using a discount rate of 14%? c. Should the company accept or reject it using a discount rate of 20%?
Cash Flows:
Year 0 = -$200,000
Year 1 = $23,000
Year 2 = $72,000
Year 3 = $157,000
Year 4 = $157,000
Answer a.
Discount Rate = 10%
NPV = -$200,000 + $23,000/1.10 + $72,000/1.10^2 +
$157,000/1.10^3 + $157,000/1.10^4
NPV = $105,602.76
Company should accept this project as NPV is positive.
Answer b.
Discount Rate = 14%
NPV = -$200,000 + $23,000/1.14 + $72,000/1.14^2 +
$157,000/1.14^3 + $157,000/1.14^4
NPV = $74,504.23
Company should accept this project as NPV is positive.
Answer c.
Discount Rate = 20%
NPV = -$200,000 + $23,000/1.20 + $72,000/1.20^2 +
$157,000/1.20^3 + $157,000/1.20^4
NPV = $35,736.88
Company should accept this project as NPV is positive.
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