For the given cash flows, suppose the firm uses the NPV decision rule. Year Cash...

For the given cash flows, suppose the firm uses the NPV decision rule.

Year	Cash Flow
0	–$	146,000
1		70,000
2		69,000
3		53,000

At a required return of 11 percent, what is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

NPV            $

At a required return of 22 percent, what is the NPV of the project? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

NPV            $

Solutions

Expert Solution

Part 1: At required return of 11%

NPV=-Initial cash outflow + Present value of future cash flows
Present value of future cash flows=Cash flow in year 1/(1+Required return)^1+Cash flow in year 2/(1+Required return)^2+Cash flow in year 3/(1+Required return)^3
Using the cash flows given in the question, we get:
Present value of future cash flows=70000/(1+11%)^1+69000/(1+11%)^2+53000/(1+11%)^3
=70000/(1.11)^1+69000/(1.11)^2+53000/(1.11)^3
=70000/1.11+69000/1.2321+53000/1.367631
=63063.06306+56001.94789+38753.14321
=157818.1542
Present value of future cash flows=$157818.1542
Initial cash outflow=$146000
NPV=-$146000+$157818.1542=$11818.1542 or $11818.15 (Rounded to two decimal places)

Part 2: At required return of 22%

Present value of future cash flows=70000/(1+22%)^1+69000/(1+22%)^2+53000/(1+22%)^3
=70000/(1.22)^1+69000/(1.22)^2+53000/(1.22)^3
=70000/1.22+69000/1.4884+53000/1.815848
=57377.04918+46358.50578+29187.46503
=132923.02
Present value of future cash flows=$132923.02
Initial cash outflow=$146000
NPV=-$146000+$132923.02=-$13076.98

jeff jeffy answered 7 months ago

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