Question

Net present value. Lepton Industries has a project with the following projected cash​ flows:

Initial cost   Cash flow year one   Cash flow year two   Cash flow year three   Cash flow year four
$463,000   $124,000   $240,000   $185,000   $124,000

a. Using a discount rate of

99​%

for this project and the NPV​ model, determine whether the company should accept or reject this project.

b. Should the company accept or reject it using a discount rate of

1717​%?

c. Should the company accept or reject it using a discount rate of

2222​%?

Answer 1

NPV = Present value of cash inflows – present value of cash outflows

a.Using discount rate of 9%,

NPV = -463,000 + 124,000/(1.09) + 240,000/(1.09)² + 185,000/(1.09)³ + 124,000/(1.09)⁴

= $83,463.34

Since NPV is positive, company should accept the project

b. Using discount rate of 17%,

NPV = -463,000 + 124,000/(1.17) + 240,000/(1.17)² + 185,000/(1.17)³ + 124,000/(1.17)⁴

= $0

Since NPV is zero, company is indifferent

c. Using discount rate of 22%,

NPV = -463,000 + 124,000/(1.22) + 240,000/(1.22)² + 185,000/(1.22)³ + 124,000/(1.22)⁴

= -$42,259.42

Since NPV is negative, company should not accept the project