Question

Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 14 percent, and that the maximum allowable payback and discounted payback statistic for the project are 2 and 3 years, respectively.

Time 0 1 2 3 4 5 6

Cash Flow -1,010 110 490 690 690 290 690

Use the NPV decision rule to evaluate this project; should it be accepted or rejected?

Multiple Choice

• $704.18, accept

• $-555.82, reject

• $1,812.77, accept

• $802.77, accept

Answer 1

The following should be entered in a financial calculator:

• Press the CF button.
• CF0= -$1,010
• Cash flow for six years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter 14%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.

The net present value is $802.77.

The project should be accepted since it has a positive net present value.