Question

Lasik Vision Inc. recently analyzed the project whose cash flows are shown below. However, before Lasik decided 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:	8.00%		New WACC:	9.75%
Year	0	1	2	3
Cash flows	-$1,000	$410	$410	$410

a. -$34.12

b. -$29.25

c. -$30.55

d. -$32.50

e. -$28.60

Answer 1

NPV needs to find by using NPV function in EXCEL

=NPV(rate,Year1 to year3 cashflows)-Year0 cashflow

When WACC=8%, NPV is

=NPV(8%,Year1 to Year3 cashflows)-$1000

NPV=$56.61

NPV when WACC=9.75%,

=NPV(9.75%,Year1 to year3 cashflows)-1000

NPV=$24.11

The difference (fall) in NPV due to increase in the WACC=$24.11-$56.11=-$32.50

Option d is correct

	Year0	-1000
	Year1	410
	Year2	410
	Year3	410
8%	NPV	56.61
9.75%	NPV	24.11
	Difference	-32.50