Question

A firm evaluates all of its projects by applying the NPV decision rule. A project under consideration has the following cash flows:

  

Year	Cash Flow
0	–$	28,500
1		12,500
2		15,500
3		11,500

  

What is the NPV for the project if the required return is 10 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

  

NPV

$

  

At a required return of 10 percent, should the firm accept this project?

	No
	Yes

  

What is the NPV for the project if the required return is 26 percent? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

  

NPV

$

  

At a required return of 26 percent, should the firm accept this project?

	Yes
	No

Answer 1

a.Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=12500/1.1+15500/1.1^2+11500/1.1^3

=$32813.67

NPV=Present value of inflows-Present value of outflows

=$32813.67-$28500

=$4313.67(Approx).

Hence since NPV is positive;project must be accepted.

b.Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=12500/1.26+15500/1.26^2+11500/1.26^3

=$25432.72

NPV=Present value of inflows-Present value of outflows

=$25432.72-$28500

=$(3067.28)(Approx).(Negative).

Hence since NPV is negative;project must be rejected.