A project that provides annual cash flows of $18,000 for ten years costs $86,000

Question

A project that provides annual cash flows of $18,000 for ten years costs $86,000 today.

What is the NPV for the project if the required return is 9 percent?

At a required return of 9 percent, should the firm accept this project?

What is the NPV for the project if the required return is 21 percent? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

At a required return of 21 percent, should the firm accept this project?

At what discount rate would you be indifferent between accepting the project and rejecting it? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

What is the NPV for the project if the required return is 9 percent?

Explanation / Answer

NPV = Present value of cash inflows - Present value of cash outflows

NPV when required rate of return is 9% = 18000*PVAF ( 9%,10years) -86000

= 29518

Project should be accepted as the NPV is positive

2) NPV when required rate of return is 21%

NPV = 18000*PVAF ( 21%,10years) -86000

= -13026

Project should not be accepted as the NPV at 21% is negative

Discount rate at which the project is indifferent is the rate at which NPV is 0

0=18000*PVAF(r,10 years)-86000

86000=18000*PVAF(r,10 Years)

86000/18000=PVAF(r,10years)

4.77 = PVAF (r,10 years)

17%+0.36%

17.36%

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