A project that costs $2,700 to install will provide annual cash flows of $620 fo

Question

A project that costs $2,700 to install will provide annual cash flows of $620 for the next 5 years. The firm accepts projects with payback periods of less than 5 years a-1. What is this project's payback period? (Round your answer to 3 decimal places.) Payback period years a-2. Will the project be accepted? es No b-1, what is project NPV if the discount rate is 3%? (Do not round intermediate calculations. Round your answer to 2 decimal places.) NPV b-2. Should this project be pursued? es No b-3. What is project NPV if the discount rate is 11%? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.) NPV b-4. Should this project be pursued? es O No b-5. Will the firm's decision change as the discount rate changes? No O Yes

Explanation / Answer

a-1. Payback period = Costs ÷ Annual cash flows = 2,700÷620 = 4.35 years

a-2. The firm will accept the project if the payback period is less than 5 years. Since, the payback period is 4.35 years, which is less than 5 years. Therefore, the project should be accepted.

b-1. NPV = Annual cash flows × PVIFA of $1 (3%, 5 years) - Costs = 620×4.5797 - 2,700 = 2,839.41-2,700 = $139.41

b-2. NPV at 3% is positive, therefore, the project should be pursued.

b-3. NPV = Annual cash flows × PVIFA of $1 (11%, 5 years) - Costs = 620×3.6959 - 2,700 = 2,291.46-2,700 = -$408.54

b-4. NPV at 11% is negative, therefore, the project should not be pursued.

b-5. Yes, the firm's decision will change as the discount rate changes, due to change in NPV as the discount rate changes.

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