Question

Anderson Systems is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that if a project's projected NPV is negative, it should be rejected.

WACC:	11.00%
Year	0	1	2	3
Cash flows	-$1,000	$500	$500	$500

a. 0241.82

b. 0257.35

c. 0195.23

d. 0259.57

e. 0221.86

Answer 1

The correct answer is e 0221.86
Net Present Value (NPV) = Present value of cash inflows - Initial Investment.

NPV ( Decision making rule)

1. A project with a positive NPV should be selected.
2. A project with a negative NPV should be rejected.

As the NPV of the project is positive it should be accepted.

Note - How did we calculate the discounting factors @11%

Year 0 = The discounting factor is always 1.
Year 1 = 1/1.11
= 0.9009
Year 2 = 0.9009/1.11
= 0.8116
Year 3 = 0.8116/1.11
= 0.7312