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: $270,000
Cash flow year one: $24,000
Cash flow year two: $79,000
Cash flow year three: $155,000
Cash flow year four: $155,000
a. Using a discount rate of 10% 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 20%?
Solutions
Expert Solution
a.Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)
=24000/1.1+79000/1.1^2+155000/1.1^3+155000/1.1^4
=$309,428.32
NPV=Present value of inflows-Present value of outflows
=$309,428.32-$270,000
=$39,428.32(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)
=24000/1.13+79000/1.13^2+155000/1.13^3+155000/1.13^4
=$285594.70
NPV=Present value of inflows-Present value of outflows
=$285594.70-$270,000
=$15594.70(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)
=24000/1.2+79000/1.2^2+155000/1.2^3+155000/1.2^4
=$239309.41
NPV=Present value of inflows-Present value of outflows
=$239309.41-$270,000
=($30690.59)(Approx).(Negative).
Hence since NPV is negative;project must be rejected.
jeff jeffy answered 1 year agoRelated Solutions
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