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A project that costs $2,600 to install will provide annual cash flows of $610 fo

ID: 2724859 • Letter: A

Question

A project that costs $2,600 to install will provide annual cash flows of $610 for the next 5 years. The firm accepts projects with payback periods of less than 4 years.

What is this project's payback period?

Will the project be accepted?

What is project NPV if the discount rate is 4%?

What is project NPV if the discount rate is 9%?

a1.

What is this project's payback period?

a-2.

Will the project be accepted?

b1.

What is project NPV if the discount rate is 4%?

b3.

What is project NPV if the discount rate is 9%?

b-5. Will the firm’s decision change as the discount rate changes?

Explanation / Answer

Project cost = $ 2,600

annual cash flows are $ 610 for 5 years

payback period = cash outlay/cash inflow

2600/610=4.26 years

so the payback period is more than 4 years the project will not be accepted.

NPV of the project at 4% discount rate=

-$ 2,600+$ 610(PVIFA ( 4%, 5)

-$ 2,600+610( 4.452) -$ 2600+2715.72= $ 115.72

NPV at 9% -$ 2600+610(3.890)

-$ 2600+2372.90= -$ 227.10

YES the firms decision changes when the discount rate changes because there is nagitive NPV at 9% discount rate

  

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