Question

For the given cash flows, suppose the firm uses the NPV decision rule. |

Year | Cash Flow | |

0 | –$ 153,000 | |

1 | 78,000 | |

2 | 67,000 | |

3 | 49,000 | |

Requirement 1: |

At a required return of 9 percent, what is the NPV of the
project? |

NPV | $ |

Requirement 2: |

At a required return of 21 percent, what is the NPV of the
project? |

NPV | $ |

Answer #1

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

=78000/1.09+67000/1.09^2+49000/1.09^3

=$165,789.18

NPV=Present value of inflows-Present value of outflows

=$165,789.18-$153000

**=$12,789.18(Approx).**

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

=78000/1.21+67000/1.21^2+49000/1.21^3

=$137,883.93

NPV=Present value of inflows-Present value of outflows

=$137,883.93-$153000

**=$(15116.07)(Approx).(Negative).**

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