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	–$	28,600
1		12,600
2		15,600
3		11,600

  

What is the NPV for the project if the required return is 11 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) At a required return of 11 percent, should the firm accept this project? Yes No What is the NPV for the project if the required return is 25 percent? (A negative answer 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 25 percent, should the firm accept this project? Yes No

Answer 1

	CALCULATION OF THE PRESENT VALUE OF THE CASH FLOW
	INTEREST RATE @ 11%; So Discounting factor is also 11%
	Year	Cash Flow	PVF of $ 1 @11%	Present Value (Cash Flow X PVF )
	0	$          -28,600.00	1.0000	$                -28,600.00
	1	$                  12,600	0.9009	$                  11,351.35
	2	$                  15,600	0.8116	$                  12,661.31
	3	$                  11,600	0.7312	$                    8,481.82
		Total Present Value		$                    3,894.48
	Net present Value of the Project @ 11% =			$                    3,894.48
	Net present value is the positive so the Firm should accept this project.
	Should Firm Accept the Project = Yes
	CALCULATION OF THE PRESENT VALUE OF THE CASH FLOW
	INTEREST RATE @ 25%; So Discounting factor is also 25%
	Year	Cash Flow	PVF of $ 1 @25%	Present Value (Cash Flow X PVF )
	0	$          -28,600.00	1.0000	$                -28,600.00
	1	$                  12,600	0.8000	$                  10,080.00
	2	$                  15,600	0.6400	$                    9,984.00
	3	$                  11,600	0.5120	$                    5,939.20
		Total Present Value		$                  -2,596.80
	Net present Value of the Project @ 25% =			$                  -2,596.80
	Net present value is the Negative so the Firm should not accept this project.
	Should Firm Accept the Project = No