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.