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 12 percent? (Do not round intermediate calculations and round your final 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 final 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

To calculate NPV of the given project below formula will be used for both the above questions

NPV= ( CF1/(1+r)^t1+CF2/(1+r)^t2+CF3/(1+r)^t3 ) - Initial investment

A) if required rate of return is 12%,by applying above formula NPV will be calculate as below :

NPV = ( 13000/(1+0.12) ^1+ 16000/(1+0.12)^2 + 12000/(1+0.12)^3 ) - 29000

NPV =( 13000/ 1.12 + 16000/ 1.25+ 12000/1.40 ) - 29000

NPV = ( 11607.14 + 12800 + 8571.43) - 29000

NPV = $ 3978.57

NPV is greater than 0 hence project must be accepted

B) if required rate of return is 24%

( 13000/(1+0.24)^1 + 16000/(1+0.24)^2 + 12000 (1+0.24)^3 ) - 29000

( 13000/1.24 + 16000/1.54 + 12000/1.91 ) - 29000

10483.87 + 10389.61 + 6282.73 - 29000

- $1843.79

NPV is less than zero hence project should be rejected.

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