In: Finance
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
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. |