A firm is considering a $12,000 risky project. The expected cash flows are $3,000 in year...

A firm is considering a $12,000 risky project. The expected cash flows are $3,000 in year 1, $5,000 in year 2, and $7,000 in year 3. The firm's cost of capital is 11%, but the financial manager uses a hurdle rate of 9% for less-risky projects and 13% for riskier projects. Should the firm invest in this riskier project?

No, the NPV is -$578.05

No, the NPV is -$120.85

Yes, the NPV is $578.05

Yes, the NPV is $120.85

Yes, the NPV is $365.98

Solutions

Expert Solution

The correct answer is option A i.e. No, the NPV is -$578.05

Year	Cashflow	PV @13%
0	$ -12,000	$ -12,000
1	$ 3,000	$ 2,655
2	$ 5,000	$ 3,916
3	$ 7,000	$ 4,851
		$ -578.05

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jeff jeffy answered 1 year ago

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