Question

An INDEPENDENT project costs $1,000,000 and will return cash flows of $300,000 for 4 years. If...


An INDEPENDENT project costs $1,000,000 and will return cash flows of $300,000 for 4 years.

If you knew the firm's cost of capital rate (discount rate), which of the following measures would you use to determine whether to clearly ACCEPT or REJECT the project?
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Answer #1

Initial Investment = Project Cost = $ 1000000, Annual Cash Flow = $ 300000 and Tenure of Project = 4 years

If the firm's cost of capital is known, then the NPV measure will be used to ACCEPT or REJECT the Project. If the cost of capital is assumed to be R%, then NPV will be calculated as shown below:

NPV = 300000 x (1/R) x [1-{1/(1+R)^(4)}] - 1000000

A Positive Value of NPV should lead to the project being accepted whereas a negative value of NPV should lead to the project being rejected.

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