Question

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

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

  

Year                 Cash Flow
0 –$29,000      
1 20,000      
2 16,000      
3 5,000      

  

a. At a required return of 25 percent, what is the NPV for this project?

b. At a required return of 41 percent, what is the NPV for this project?
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Answer #1

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

=20000/1.25+16000/1.25^2+5000/1.25^3

=$28800

NPV=Present value of inflows-Present value of outflows

=$28800-$29000

=($200)(Negative).

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

=20000/1.41+16000/1.41^2+5000/1.41^3

=$24015.94

NPV=Present value of inflows-Present value of outflows

=$24015.94-$29000

=($4984.06)(Negative).(Approx).

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