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Calculate the NPV and explain if the project should be accepted if the WACC is 10%...

  1. Calculate the NPV and explain if the project should be accepted if the WACC is 10% and the initial investment is $35,000. Cash flows for years 1 through 3 are: $20,000; ($15,000) and $12,000. Why would you not use the IRR method to evaluate this project?
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Answer #1
YEAR 1 2 3
Cash Inflow 20000 (15000) 12000
Present Value @ 10% 18181.81 (12396.69) 9015.78
Total 14800.91
Initial Cash Outflow 35000
Net Present Value (20199.09)

Since NPV is negative the project should not be accepted.

We should not use IRR method to evaluate the project because IRR is the rate of return, at which cash inflow is equivalent to cash outflow i.e NPV = 0 or indifferent and it will not be possible to decide whether to go with the project or not.

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