Question

Joe and Rich are both considering investing in a project that costs $25,500 and is expected to produce cash inflows of $15,800 in Year 1 and $15,300 in Year 2. Joe has a required return of 8.5 percent but Rich demands a return of 14.5 percent. Who, if either, should accept this project?

A. Neither Joe nor Rich
	B. Rich, but not Joe
	C. Joe, but not Rich
	D. Both Joe and Rich
	E. Joe, and possibly Rich, who will be neutral on this decision as his net present value will equal zero

Answer 1

Joe

Net present value can be solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$25,500. Indicate the initial cash flow by a negative sign since it is a cash outflow.  
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the required return of 8.5%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.  

Net present value at 8.5% required return is $2,058.88.

Rich

Net present value can be solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$25,500. Indicate the initial cash flow by a negative sign since it is a cash outflow.  
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the required return of 14.5%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.  

Net present value at 14.5% required return is -$30.62.

Joe should accept the project since investment generates a positive net present value and Rich should not accept the project since investment generates a negative net present value.

Hence, the answer is option c.