Question

Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 8 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively.

Time:	0	1	2	3	4	5	6
Cash flow:	–$4,900	$1,260	$2,460	$1,660	$1,660	$1,460	$1,260

Use the NPV decision rule to evaluate this project. (Do not round intermediate calculations and round your final answer to 2 decimal places.)

NPV__________

Should it be accepted or rejected?

• accepted

• rejected

Answer 1

Year	Cashflow	PVF@8%	Cashflow*PVF
0	(4,900)	1	(4,900.00)
1	1,260	0.9259	1,166.67
2	2,460	0.8573	2,109.05
3	1,660	0.7938	1,317.76
4	1,660	0.7350	1,220.15
5	1,460	0.6806	993.65
6	1,260	0.6302	794.01

NPV = PV of Inflows-PV of Outflows

= (1166.67+2109.05+1317.76+1220.15+993.65+794.01)-4900

= 7601.30-4900

= $2701.30

Decision: Since the NPV is positive, accept the project

You can use the equation 1/(1+i)^n to find PVF using calculator

Formula to calculate PV in excel is as follows "=PV(interest rate,Year,0,cashflow)"

Formula to calculate NPV in excel is as follows "=NPV(Rate,cashflows)+initial investment"