Net present value. Lepton Industries has a project with the following projected

Question

Net present value. Lepton Industries has a project with the following projected cash flows: Initial cost: $468,000 Cash flow year one: $134,000 Cash flow year two: $250,000 Cash flow year three: $192,000 Cash flow year four: $134,000 a. Using a discount rate of 11% for this project and the NPV model, determine whether the company should accept or reject this project b. Should the company accept or reject it using a discount rate of 16%? C. Should the company accept or reject it using a discount rate of 18%? Using a discount rate of 11%, this project should be b. Using a discount rate of 16%, this project should be | c. Using a discount rate of 18%, this project should be ! Select from the drop-down menu. | (Select from the dropdown menu.) (Select from the drop-down menu.) a 1

Explanation / Answer

Answer a Calculation of NPV Year Cash flow Discount Factor @ 11% Present Values 0 -$468,000 1 -$468,000.00 1 $134,000 0.900901 $120,720.72 2 $250,000 0.811622 $202,905.61 3 $192,000 0.731191 $140,388.75 4 $134,000 0.658731 $88,269.95 NPV $84,285.02 The NPV of project cash flows is positive at 11% discount rate , hence the company should accept this project. Answer b Calculation of NPV Year Cash flow Discount Factor @ 16% Present Values 0 -$468,000 1 -$468,000.00 1 $134,000 0.862069 $115,517.24 2 $250,000 0.743163 $185,790.73 3 $192,000 0.640658 $123,006.27 4 $134,000 0.552291 $74,007.01 NPV $30,321.25 The NPV of project cash flows is positive at 16% discount rate , hence the company should accept this project. Answer c Calculation of NPV Year Cash flow Discount Factor @ 18% Present Values 0 -$468,000 1 -$468,000.00 1 $134,000 0.847458 $113,559.32 2 $250,000 0.718184 $179,546.11 3 $192,000 0.608631 $116,857.13 4 $134,000 0.515789 $69,115.71 NPV $11,078.27 The NPV of project cash flows is positive at 18% discount rate , hence the company should accept this project.

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