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Last month, Exxon Systems analyzed the project whose cash flows are shown below. However, before the...

Last month, Exxon Systems analyzed the project whose cash flows are shown below. However, before the decision to accept or reject the project, the Federal Reserve took actions that changed interest rates and therefore the firm's WACC. The Fed's action did not affect the forecasted cash flows. By how much did the change in the WACC affect the project's forecasted NPV?


Old WACC:

9.00%

New WACC:

9.25%

Year

0

1

2

3

Cash flows

-$1,000

$710

$610

$310
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Answer #1

Old WACC = 9% = 0.09

New WACC = 9.25 % = 0.0925

where CF = cash inflow and t = number of years

Old NPV = $ 710 / ( 1 + 0.09 )1 + $ 610 / ( 1 + 0.09 )2 + $ 310 / ( 1 + 0.09 )3 - $ 1,000

= $ 1,404.18 - $ 1,000

= $ 404.18

where CF = cash inflow and t = number of years

New NPV = $ 710 / ( 1 + 0.0925 )1 + $ 610 / ( 1 + 0.0925 )2 + $ 310 / ( 1 + 0.0925 )3 - $ 1,000

= $ 1,398.70 - $ 1,000

= $ 398.70

Change in NPV = New NPV - Old NPV

= $ 398.70 - $ 404.18

= - $ 5.48

Forecasted NPV decreases by $ 5.48

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