Question

18. Last month, Lloyd's Systems analyzed the project whose cash flows are shown below. However, before the decision to accept or reject the project, the Federal Reserve took actions that changed interest rates and therefore the firm's WACC. The Fed's action did not affect the forecasted cash flows. By how much did the change in the WACC affect the project's forecasted NPV? Note that a project's projected NPV can be negative, in which case it should be rejected.

Old WACC:	10.00%		New WACC:	9.50%
Year	0	1	2	3
Cash flows	-$1,000	$410	$410	$410

	a.	0$9.04
	b.	0$11.12
	c.	0$10.22
	d.	0$10.85
	e.	0$10.13

Answer 1

Ans:- NPV = Present Value of Future cash flows - Initial Investment. we will use the NPV function of excel to calculate the Present Value and then subtract with an initial investment to get the NPV.

Therefore, the changes in the projects forecasted NPV is approx $9.04 if there is a change in the WACC by Federal reserve actions. option (a) is the right answer.

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