Question

Lepton Industries has a project with the following projected cash​ flows:

Initial cost: $470,000

Cash flow year one: $120,000

Cash flow year two: $300,000

Cash flow year three: $193,000

Cash flow year four: $120,000

a. Using a discount rate of 11% 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 14%?

c. Should the company accept or reject it using a discount rate of 22​%?

Answer 1

a. NPV = Present Value of Cash Inflows - Present Value of Cash Outflows

= [ 120000*1/(1.11)^1+300000*1/(1.11)^2+193000*1/(1.11)^3+120000*1/(1.11)^4]-470000

= $ 101,762.4916

Since the NPV is positive, the company should accept this project.'

Answer = Accept

b.

NPV = Present Value of Cash Inflows - Present Value of Cash Outflows

= [ 120000*1/(1.14)^1+300000*1/(1.14)^2+193000*1/(1.14)^3+120000*1/(1.14)^4]-470000

= $ 67,422.55

Since the NPV is positive, the company should accept this project.'

Answer = Accept.

c.

NPV = Present Value of Cash Inflows - Present Value of Cash Outflows

= [ 120000*1/(1.22)^1+300000*1/(1.22)^2+193000*1/(1.22)^3+120000*1/(1.22)^4]-470000

=- $ 9,626.30

Since the NPV is negative, the company should not accept this project.'

Answer = Reject.