Chapter 9, #4 A firm evaluates all of its projects by applying the NPV decision

Question

Chapter 9, #4

A firm evaluates all of its projects by applying the NPV decision rule. A project under consideration has the following cash flows:

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.)

What is the NPV for the project if the required return is 24 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.)

Explanation / Answer

1 Calculation of NPV @12% Year Cash Flows Present value factor@ Present Value 12% 0 -28700 1.000 -28700.00 1 12700 0.893 11339.29 2 15700 0.797 12515.94 3 11700 0.712 8327.83 Net Present Value(NPV) 3483.06 Decision: As NPV is positive at 12% rate of return, project should be accepted 2 Calculation of NPV @24% Year Cash Flows Present value factor@ Present Value 24.00% 0 -28700 1.000 -28700.00 1 12700 0.806 10241.94 2 15700 0.650 10210.72 3 11700 0.524 6136.50 Net Present Value(NPV) -2110.85 Decision: As NPV is negative at 24% rate of return, project should not be accepted

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