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	–$	28,300
1		12,300
2		15,300
3		11,300

１.What is the NPV for the project if the required return is 11 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

NPV

2.At a required return of 11 percent, should the firm accept this project?

	Yes
	No

3. What is the NPV for the project if the required return is 25 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

  

4.At a required return of 25 percent, should the firm accept this project?

	Yes
	No

Answer 1

1) NPV = PV of cash inflows - PV of cash outflows

rate of return, r = 11%

Initial cost = $28,300

C₁ = 12,300 ;C₂ = 15,300 , C₃ = 11,300

NPV = 12300 / (1 + 0.11) + 15300 / (1 + 0.11)² + 11300 / ( 1 + 0.11)³ - 28300

NPV = 11081.08 + 12417.82 + 8262.46 - 28300 = 3461.36

The NPV for the project is $3461.36

2) Yes, the firm should accept the project at required rate of return of 11% as NPV is positive.

3) Using similar formula as above to calculate NPV if rate of return,r = 25%

NPV = 12300 / (1 + 0.25) + 15300 / (1 + 0.25)² + 11300 / ( 1 + 0.25)³ - 28300

NPV = 9840 + 9792 + 5785.6 - 28300 = - 2882.4

NPV = - $2882.40

4) At a required rate of return of 25% , firm should not accept the project as NPV is negative.