Question

A firm evaluates all of its projects by applying the NPV decision rule. A project under consideration has the following cash flows: Year Cash Flow 0 –$ 27,400 1 11,400 2 14,400 3 10,400 What is the NPV for the project if the required return is 12 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV $ At a required return of 12 percent, should the firm accept this project? No Yes What is the NPV for the project if the required return is 24 percent? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV $ At a required return of 24 percent, should the firm accept this project? Yes No

Answer 1

Initial Investment = $ 27,400

NPV at Required Return = 12 % = 0.12

= $ 11,400 / ( 1 + 0.12 )¹ + $ 14,400 / ( 1 + 0.12 )² + $ 10,400 / ( 1 + 0.12 )³ - $ 27,400

= $ 29,060.68 - $ 27,400

= $ 1,660.68

Yes, the project should be accepted as NPV is positive

NPV at Required Return = 24 % = 0.24

= $ 11,400 / ( 1 + 0.24 )¹ + $ 14,400 / ( 1 + 0.24 )² + $ 10,400 / ( 1 + 0.24 )³ - $ 27,400

= $ 24,013.46 - $ 27,400

= - $ 3,386.54

No, the project should not be accepted as NPV is negative