Suppose your firm is considering investing in a project with the cash flows show
ID: 2744138 • Letter: S
Question
Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 12 percent, and that the maximum allowable payback and discounted payback statistic for the project are 2 and 3 years, respectively.
770
Use the NPV decision rule to evaluate this project; should it be accepted or rejected?
A. 864.87, accept
B. 2118.66, accept
C. 968.66 accept
D. $-495.13, reject
Time 0 1 2 3 4 5 6 Cash Flow -1,150 30 570 770 770 370770
Explanation / Answer
Calculation of the Net Present Values NPV = Present Value of Cash Inflows- Cash Outflows 30/(1.12)^1+570/(1.12)^2+770/(1.12)^3+770/(1.12)^4+370/(1.12)^5+770/(1.12)^6-1150 30*.892+570*.797+770*.712+770*.635+370*.567+770*.506-1150 26.78+454.40+548.07+489.35+209.95+390.11-1150 . $968.66 The Net Present Value is $ 968.66 As the NPV is positive, so the project should be accepted
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