Question

A firm is evaluating a project with the following cash flow:

Year 0: -$28,000

Year 1: $12,000

Year 2: $15,000

Year 3: $11,000

A) If the required return is 14%, what is the NPV?

B) What is the IRR?

C) If the required return is 11%, using the NPV rule, should the firm accept the project?

D) What if the required return is 25%, should the firm accept the project?

Answer 1

Solution :

A) If the required return is 14%, what the NPV = $ 1,493.02

B) The IRR = 17.18 %

C) If the required return is 11%, the NPV = $ 3,028.25

Using the NPV Rule, the firm should accept the project, as the NPV is positive at $ 3,028.25

D) If the required return is 25% ,the NPV is = - $ 3,168

Using the NPV Rule, the firm should not accept the project, as the NPV is negative at $ 3168

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

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