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 9 percent, and that the maximum allowable payback and discounted payback statistics for the project are 2.0 and 3.0 years, respectively.

Time:	0	1	2	3	4	5	6
Cash flow:	−$7,600	$1,190	$2,390	$1,590	$1,590	$1,390	$1,190

Use the NPV decision rule to evaluate this project. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your final answer to 2 decimal places.)

Should it be accepted or rejected?

• accepted

• rejected

Answer 1

=> Net Present Value of a project is sum of all the present values of the cash flows.

=> We can find the Present value of a cash flow by using the formula:

, where C is the cash flow, r is the required rate of return and t is the time period.

=> According to NPV decision rule, we can accept the project if NPV is greater than 0.

=> Here NPV is -529.51 which is less than 0, so we cannot accept the project. Therefore, we have to reject the project.

Formula used in excel: