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	–$	27,300
1		11,300
2		14,300
3		10,300

A) What is the NPV for the project if the required return is 10 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

At a required return of 10 percent, should the firm accept this project?

Yes No

What is the NPV for the project if the required return is 26 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.)

At a required return of 26 percent, should the firm accept this project?

Yes No

Answer 1

Solution:
A.	NPV at 10% required rate of return	2,529.45
	YES
	Accept this project as , project is generating positive NPV after discounting cash flow with required rate of returns means the project is able to generate more return than required rate of return hence it is an acceptable project .
Working Notes:
	I	II	III= II x I
Year	Cash Flow	PVF @ 10%	Present Value
0	-27300	1	-27,300.00000
1	11300	0.909090909	10,272.72727
2	14300	0.826446281	11,818.18182
3	10300	0.751314801	7,738.54245
		NPV	2,529.45
Notes: PVF is calculated @ 10% = 1/(1+0.10)^n     where n is the period for which PVF is calculated.
B.	NPV at 26% required rate of return	-4,175.41
	NO
	Reject this project as , project is generating negative NPV after discounting cash flow with required rate of returns means the project is not able to generate return equal to required rate of return hence it is not an acceptable project .
Working Notes:
	I	II	III= II x I
Year	Cash Flow	PVF @ 26%	Present Value
0	-27300	1	-27,300.00000
1	11300	0.793650794	8,968.25397
2	14300	0.629881582	9,007.30663
3	10300	0.499906018	5,149.03198
		NPV	-4,175.41
Notes: PVF is calculated @ 26% = 1/(1+0.26)^n     where n is the period for which PVF is calculated.
Please feel free to ask if anything about above solution in comment section of the question.