Consider Project Theta, its time line of cash flows, and one of the project IRRs

Question

Consider Project Theta, its time line of cash flows, and one of the project IRRs: Year................0..............1................2................IRR Cash Flow...($200).....$850........($700)..........15% What is the best decision for Project Theta (accept or reject) if the project’s required rate of return is 15% and why?

Reject the project because the NPV is less than zero

Reject the project because the IRR is less than the required rate of return

Accept the project because the payback is short

Accept the project because the IRR is greater than zero

Accept the project because the NPV is greater than zero

Reject the project because the NPV is less than zero

Reject the project because the IRR is less than the required rate of return

Accept the project because the payback is short

Accept the project because the IRR is greater than zero

Accept the project because the NPV is greater than zero

Explanation / Answer

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=850/1.15

=$739.13(Approx)

Present value of outflows=cash outflow*Present value of discounting factor(rate%,time period)

=200+700/1.15^2

=$729.30(Approx)

NPV=Present value of inflows-Present value of outflows

=$739.13-$729.30

=$9.83(Approx)

Hence the correct option is E.

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