Question

Net present value. Lepton Industries has a project with the following projected cash​ flows:

Initial​ cost: ​$460,000

Cash flow year​ one: ​$132,000

Cash flow year​ two: ​$200,000

Cash flow year​ three: ​$191,000

Cash flow year​ four: ​$132,000

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​%?

Answer 1

a.Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=132000/1.11+200,000/1.11^2+191000/1.11^3+132000/1.11^4

=$507,853.45

NPV=Present value of inflows-Present value of outflows

=$507,853.45-$460,000

=$47,853.45(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)

=132000/1.13+200,000/1.13^2+191000/1.13^3+132000/1.13^4

=$486,774.15

NPV=Present value of inflows-Present value of outflows

=$486,774.15-$460,000

=$26,774.15(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)

=132000/1.22+200,000/1.22^2+191000/1.22^3+132000/1.22^4

=$407,338.90

NPV=Present value of inflows-Present value of outflows

=$407,338.90-$460,000

=$(52661.10)(Approx).(Negative).

Hence since NPV is negative;project must be rejected.