Question

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%?

Answer #1

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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