Question
In: Finance
Net present value. Quark Industries has a project with the following projected cash flows: Initial cost:...
Net present value. Quark Industries has a project with the following projected cash flows: Initial cost: $210,000 Cash flow year one: $25,000 Cash flow year two: $72,000 Cash flow year three: $146,000 Cash flow year four: $146,000 a. Using a discount rate of 11% for this project and the NPV model, determine whether the company should accept or reject this project. b. Should the company accept or reject it using a discount rate of 13%? c. Should the company accept or reject it using a discount rate of 22%?
Solutions
Expert Solution
a.Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)
=25000/1.11+72000/1.11^2+146000/1.11^3+146000/1.11^4
=$283,888.00
NPV=Present value of inflows-Present value of outflows
=$283,888.00-$210,000
=$73,888.00(Approx).
Hence since NPV is positive;project must be accepted.
b.Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)
=25000/1.13+72000/1.13^2+146000/1.13^3+146000/1.13^4
=$269240.31
NPV=Present value of inflows-Present value of outflows
=$269240.31-$210,000
=$59240.31(Approx).
Hence since NPV is positive;project must be accepted.
c.Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)
=25000/1.22+72000/1.22^2+146000/1.22^3+146000/1.22^4
=$215,173.37
NPV=Present value of inflows-Present value of outflows
=$215,173.37-$210,000
=$5,173.37(Approx).
Hence since NPV is positive;project must be accepted.
jeff jeffy answered 1 year agoRelated Solutions
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