Question

If a company has a required rate of return of 15%, should the following project be accepted based on these expected cash flows below?

	Year	0	1	2	3	4	5	6
	Cash Flow	(274,000)	68,000	73,000	76,500	78,000	82,500	77,000
	Please explain why or why not the company should move forward with this endeavor.
	Answer:

Answer 1

We can calculate the Net Present value of project in following manner

Net present value (NPV) of Project = Sum of [net cash inflows/ (1+r) ^t] - initial cash outflow

Where,

The cost of capital or required rate of return r =15%

And time period t = 1, 2, 3, 4, 5 and 6

The required rate of return of Company is 15%
Year (t)	0	1	2	3	4	5	6
Cash Flow (CF)	-274,000	68,000	73,000	76,500	78,000	82,500	77,000
Present Value (PV) of cash Flow @15% = CF/(1+15%)^t	-274,000	59,130	55,198	50,300	44,597	41,017	33,289
Net Present Value (NPV) (Sum of all PVs)	9,532
The company should move forward with this endeavor because the Net Present Value (NPV) of the project is positive ($9,532)
Answer: NPV is $9,532 therefore project should be accepted

Formulas used in excel calculation: