A project that provides annual cash flows of $18,300 for ten years costs $89,000

Question

A project that provides annual cash flows of $18,300 for ten years costs $89,000 today. What is the NPV for the project if the required return is 9 percent? NPV $ At a required return of 9 percent, should the firm accept this project? Accept Reject What is the NPV for the project if the required return is 21 percent?NPV $ At a required return of 21 percent, should the firm accept this project? Accept Reject At what discount rate would you be indifferent between accepting the project and rejecting it?

Explanation / Answer

Solution:

Net Present value = PV of cash flows - Initial investment

NPV @ 9% - The project should be accepted

NPV @ 21%, the project should be rejected

At 15.83%, the project will be indifferent

Year Cash flows PVF @ 9% PV PVF @ 21% PV 0 -89000 1 -89000 1 -89000 1 18300 0.917431 16788.99 0.826446 15123.97 2 18300 0.84168 15402.74 0.683013 12499.15 3 18300 0.772183 14130.96 0.564474 10329.87 4 18300 0.708425 12964.18 0.466507 8537.085 5 18300 0.649931 11893.74 0.385543 7055.442 6 18300 0.596267 10911.69 0.318631 5830.944 7 18300 0.547034 10010.73 0.263331 4818.962 8 18300 0.501866 9184.153 0.217629 3982.613 9 18300 0.460428 8425.828 0.179859 3291.416 10 18300 0.422411 7730.118 0.148644 2720.178

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