Question

A firm evaluates all of its projects by using the NPV decision rule.

  

Year	Cash Flow
0	–$29,000
1	22,000
2	17,000
3	7,000

  

a. At a required return of 23 percent, what is the NPV for this project?

b. At a required return of 33 percent, what is the NPV for this project?

Answer 1

Present value factor

= 1 / (1 + r) ^ n

Where,

r = Rate of interest = 23% or 33% that is 0.23 or 0.33

n = Number of years = 0 to 3

So, PV Factor for year 2 at 23% will be

= 1 / (1.23^2)

= 1 / 1.5129

= 0.660982

The following tables show the calculations:

a)

Calculations	Particulars
	Years	0	1	2	3
A	Cash Flows	-29000	22000	17000	7000
B	PV Factor	1	0.813008	0.660982	0.537384
C = A x B	Present Value	-29000	17886.18	11236.70	3761.69
D = Sum C	Net Present Value	3884.56

b)

Calculations	Particulars
	Years	0	1	2	3
A	Cash Flows	-29000	22000	17000	7000
B	PV Factor	1	0.75188	0.565323	0.425055
C = A x B	Present Value	-29000	16541.35	9610.49	2975.38
D = Sum C	Net Present Value	127.23