Question

A firm evaluates all of its projects by using the NPV decision rule.

  

Year	Cash Flow
0	–$31,000
1	21,000
2	12,000
3	5,000

  

a. At a required return of 15 percent, what is the NPV for this project?

b. At a required return of 40 percent, what is the NPV for this project?

Answer 1

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

=21000/1.15+12000/1.15^2+5000/1.15^3

=30622.17

NPV=Present value of inflows-Present value of outflows

=30622.17-31000

=$-377.83(Approx)(Negative).

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

=21000/1.4+12000/1.4^2+5000/1.4^3

=22944.61

NPV=Present value of inflows-Present value of outflows

=22944.61-31000

=$-8055.39(Approx)(Negative).