A firm evaluates all of its projects by applying the NPV decision rule. A projec

Question

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 11 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 25 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.)

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

Explanation / Answer

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

a.Present value of inflows=11500/1.11+14500/1.11^2+10500/1.11^3

=$29806.40

NPV=Present value of inflows-Present value of outflows

=$29806.40-$27500

=$2306.40(Approx)

Hence since NPV is positive;project must be accepted.

b.Present value of inflows=11500/1.25+14500/1.25^2+10500/1.25^3

=$23856

NPV=Present value of inflows-Present value of outflows

=$23856-$27500

=$(3644)(Approx)(Negative).

Hence since NPV is negative;project must be rejected.

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