Your firm is considering an investment that will cost $920,000 today. The investment will produce cash...

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 14%?

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

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Expert Solution

Project
Discount rate	12.000%
Year	0	1	2	3	4	5
Cash flow stream	-920000.000	450000.000	270000.000	270000.000	270000.000	200000.000
Discounting factor	1.000	1.120	1.254	1.405	1.574	1.762
Discounted cash flows project	-920000.000	401785.714	215242.347	192180.667	171589.881	113485.371
NPV = Sum of discounted cash flows
NPV Project =	174283.98
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

Discount rate	14.000%
Year	0	1	2	3	4	5
Cash flow stream	-920000.000	450000.000	270000.000	270000.000	270000.000	200000.000
Discounting factor	1.000	1.140	1.300	1.482	1.689	1.925
Discounted cash flows project	-920000.000	394736.842	207756.233	182242.309	159861.675	103873.733
NPV = Sum of discounted cash flows
NPV Project =	128470.79
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

change in NPV = newNPV-oldNPV = 128470.79 - 174283.98 = -45813

jeff jeffy answered 1 year ago

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