Question

1. Your firm is considering an investment that will cost $920,000 today. The investment will produce cash flows of $450,000 in year 1, $270,000 in years 2, 3 and 4, and $200,000 in year 5. The discount rate that your firm uses for projects of this type is 12%. How much would the NPV change if discount rate increases to 8%?

		$53,373
		($45,813)
		$102,774
		($95,214)

Answer 1

Correct answer---------$102,774

Working

NPV at 12%	$            174,284
NPV at 8%	$            277,058
Change in NPV	$         (102,774)

.

Year	Cash	PV factor @12%	Present value
0	$ (920,000.00)	1	$   (920,000.00)
1	$    450,000.00	0.892857143	$      401,785.71
2	$    270,000.00	0.797193878	$      215,242.35
3	$    270,000.00	0.711780248	$      192,180.67
4	$    270,000.00	0.635518078	$      171,589.88
5	$    200,000.00	0.567426856	$      113,485.37
TOTAL			$      174,283.98

.

Year	Cash	PV factor @8%	Present value
0	$ (920,000.00)	1	$   (920,000.00)
1	$    450,000.00	0.925925926	$      416,666.67
2	$    270,000.00	0.85733882	$      231,481.48
3	$    270,000.00	0.793832241	$      214,334.71
4	$    270,000.00	0.735029853	$      198,458.06
5	$    200,000.00	0.680583197	$      136,116.64
TOTAL			$      277,057.55