Question

In: Finance

Waste Industries is evaluating a $55,500 project with the following cash flows. Years Cash Flows 1...

Waste Industries is evaluating a $55,500 project with the following cash flows.

Years Cash Flows

1 $ 9,120

2 20,200

3 26,600

4 16,300

5 26,300

The coefficient of variation for the project is 0.475.

Coefficient of Variation Discount Rate
0 0.25 7 %
0.26 0.50 9 %
0.51 0.75 13 %
0.76 1.00 16 %
1.01 1.25 19 %

Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

a. Select the appropriate discount rate.


  • 7%

  • 19%

  • 13%

  • 9%

  • 16%



b. Compute the net present value. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places.)



c. Based on the net present value should the project be undertaken?

  • No

  • Yes

Solutions

Expert Solution

Answer:
a) The appropriate discount rate is 9%
Note: As the coefficient of variation for the project 0.475, falls in the range of 0.26 - 0.50 for which the discount rate is 9%
b) Calculation of NPV
Formula will will use here
NPV = Present value of Cash inflows - Initial cost
Initial cost = 55,500.00
Year Cash Inflows Present value factor @ 9% Present value of cash inflows
1                                     9,120.00 0.91743                                             8,366.97
2                                   20,200.00 0.84168                                           17,001.94
3                                   26,600.00 0.77218                                           20,540.08
4                                   16,300.00 0.70843                                           11,547.33
5                                   26,300.00 0.64993                                           17,093.20
Total                                           74,549.52
NPV
Present vallue of cash inflows                                             74,549.52
Less: Initial cost                                             55,500.00
NPV $19,049.52 (Answer)
c) Based on the Net Present value, Yes the project should be undertaken.

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