Question

1. CAPITAL BUDGETING. For this and the next 2 questions: Consider the following cash flows. Cost of capital is 12 percent. Calculate the NPV of the project.

   Year	Cash Flow
   0	-600
   1	125
   2	250
   3	215
   4	180

   		-$21.67
   		-$1,173.33
   		$21.67
   		$1,173.33

2. CAPITAL BUDGETING. For the above project, calculate the IRR.

   		10.97%
   		21.67%
   		10.35%
   		11.73%

3. CAPITAL BUDGETING. Please consider again the above project. Suppose the project’s cost of capital is 8% instead of 12%. Given this new information, what should be the correct capital budgeting decision based on the NPV?

   		Project should be rejected. NPV is negative
   		Project should be rejected. Project’s cash flows are non-normal.
   		Project should be accepted although NPV is negative
   		Project should be accepted. NPV is positive.

Answer 1

the NPV of the project is $-21.67

IRR of the Project is 10.35%

if the cost of capital is 8% instead of 12 % the NPV is $33.05. this is positive.

If the cost of capital is 8% the capital budgeting decision based on NPV is-Project should be accepted. NPV is positive