A firm evaluates all of its projects by applying the NPV decision rule. A projec
ID: 2766818 • Letter: A
Question
A firm evaluates all of its projects by applying the NPV decision rule. A project under consideration has the following cash flows: Year Cash Flow 0 –$ 27,000 1 11,000 2 14,000 3 10,000 What is the NPV for the project if the required return is 10 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV At a required return of 10 percent, should the firm accept this project? What is the NPV for the project if the required return is 26 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.) NPV At a required return of 26 percent, should the firm accept this project?
Explanation / Answer
Solution:
1) Net Present Value for the project if the required return is 10 percent
Year
Cash Flow
PV factor @ 10%
Present Value of Cash Flow (Cash Flow x PV factor)
0
-$27,000
1.000
-$27,000
1
$11,000
0.909
$10,000.00
2
$14,000
0.826
$11,570.25
3
$10,000
0.751
$7,513.15
Net Present Value
$2,083.40
The firm should accept the project, since the NPV of project at 10% required rate of return is positive.
2) Net Present Value for the project if the required return is 26 percent
Year
Cash Flow
PV factor @ 26%
Present Value of Cash Flow (Cash Flow x PV factor)
0
-$27,000
1.000
-$27,000.00
1
$11,000
0.794
$8,730.16
2
$14,000
0.630
$8,818.34
3
$10,000
0.500
$4,999.06
Net Present Value
-$4,452.44
Firm should not accept project, since the NPV of project at 26% required rate of return is negative
Year
Cash Flow
PV factor @ 10%
Present Value of Cash Flow (Cash Flow x PV factor)
0
-$27,000
1.000
-$27,000
1
$11,000
0.909
$10,000.00
2
$14,000
0.826
$11,570.25
3
$10,000
0.751
$7,513.15
Net Present Value
$2,083.40
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