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

780

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

$806.89, accept

$911.79, accept

$-573.11, reject

$2,071.79, accept

  Time 0 1 2 3 4 5 6   Cash Flow -1,160 20 580 780 780 380

780

Explanation / Answer

Under NPV decision rule, the project should be accepted. Answer is

$911.79, accept

NPV = 2071.79 - 1160 = 911.79 (Accept)

  Time 0 1 2 3 4 5 6   Cash Flow -1,160 20 580 780 780 380 780 Discounted Cash Flow @ 13% -1,160 17.70 454.23 540.58 478.39 206.25 374.65

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