Problem 9-8 Calculating NPV [LOT A firm evaluates all of its projects by applyin

Question

Problem 9-8 Calculating NPV [LOT A firm evaluates all of its projects by applying the NPV decision rule. A project under consideration has the following cash flows: 0 $27,700 11,700 14.700 : 3. i 10,700 What is the NPV for the project if the required return is 12 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g, 32.16.) NPV At a required return of 12 percent should the firm accept this project? s the NPV for the project if the required return is 24 percent? (Negative amount should be ndicated by a minus sign. Do not round intermediate calculations and roun

Explanation / Answer

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

At 12%:

Present value of inflows=11700/1.12+14700/1.12^2+10700/1.12^3

=$29781.23

NPV=Present value of inflows-Present value of outflows

=$29781.23-$27700

=$2081.23(Approx)

Hence since NPV is positive;firm should accept the project.

At 24%:

Present value of inflows=11700/1.24+14700/1.24^2+10700/1.24^3

=$24607.85

NPV=Present value of inflows-Present value of outflows

=$24607.85-$27700

=$(3092.15)(Approx)(Negative).

Hence since NPV is negative;firm should reject the project.

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