Suppose your firm is considering investing in a project with the cash flows show

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 10 percent, and that the maximum allowable payback and discounted payback statistic for the project are 2 and 3 years, respectively.

600

Use the NPV decision rule to evaluate this project; should it be accepted or rejected?

$1,835.86, accept

$759.87, accept

$835.86, accept

$-240.13, reject

  Time 0 1 2 3 4 5 6   Cash Flow -1,000 200 400 600 600 200

600

Explanation / Answer

NPV = $835.86

The correct option is $835.86, accept

Year Cash Outflow Net Operating Cash Flows PV Factor PV 0 -1000 1 -1000 1 200 0.9091 181.82 2 400 0.8264 330.58 3 600 0.7513 450.79 4 600 0.6830 409.81 5 200 0.6209 124.18 6 600 0.5645 338.68 NPV 835.86

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