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FMA Co. analyzed the project whose cash flows are shown below. However, before the decision to...

FMA Co. analyzed the project whose cash flows are shown below. However, before the decision to accept or reject the project, the Federal Reserve took actions that changed interest rates and therefore the firm's interest rate. The Fed's action did not affect the forecasted cash flows. By how much did the change in the interest rate affect the project's forecasted NPV? Should the project be accepted? Old interest rate: 10.00% New interest rate: 12% Year 0 1 2 3 Cash flows -$1,200 $400 $500 $600

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Expert Solution

Solution:

NPV of the project with Old Interest rate of 10 % = $ 27.6484

NPV of the project with New Interest rate of 12 % = - $ 17.1921

The affect of the change in the project's forecasted NPV = $ 27.6484 - ( - $ 17.1921 )

= $ 44.8405

Please find the attached screenshot of the excel sheet containing the detailed calculation for the solution.

jeff jeffy answered 1 year ago
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