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 11 percent, and that the maximum allowable payback and discounted payback statistics for your company are 3 and 3.5 years, respectively.

Time:	0	1	2	3	4	5
Cash flow:	–$235,000	$65,800	$84,000	$141,000	$122,000	$81,200

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

Answer 1

As per NPV decision rule, if project has positive NPV then it is selected otherwise rejected.
NPV is calculated as follows:
Year	Cash flow	Discount factor	Present value
a	b	c=1.11^-a	d=b*c
0	$       -2,35,000	1.0000	$ -2,35,000.00
1	$             65,800	0.9009	$       59,279.28
2	$             84,000	0.8116	$       68,176.28
3	$         1,41,000	0.7312	$   1,03,097.98
4	$         1,22,000	0.6587	$       80,365.18
5	$             81,200	0.5935	$       48,188.25
	NPV		$   1,24,106.98
Since , project has positive NPV, the project should be selected.