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: Year Cash Flow 0 –$ 27,700 1 11,700 2 14,700 3 10,700 What is the NPV for the project if the required return is 12 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV $ At a required return of 12 percent, should the firm accept this project? Yes No 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 answer to 2 decimal places, e.g., 32.16.) NPV $ At a required return of 24 percent, should the firm accept this project? Yes No

Explanation / Answer

Calculation of the Net Present Value Year Cash Flows Discount rate Net Flow 0 -27700 1 -27700 1 11700 0.892857 10446.43 2 14700 0.797194 11718.75 3 10700 0.71178 7616.049 Net Present Value 2081.227 As the Net Present value is positive the project should be accepted NPV at 24% Calculation of the Net Present Value Year Cash Flows Discount rate Net Flow 0 -27700 1 -27700 1 11700 0.806452 9435.484 2 14700 0.650364 9560.354 3 10700 0.524487 5612.014 Net Present Value -3092.15 AS the Net Present value is negative at 24%, the project should not be accepted Net Present Value = cash Inflows- Cash Outflows

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