Suppose your firm is considering investing in a project with the cash flows show
ID: 2790765 • Letter: S
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. Time 0 1 2 3 4 5 6 Cash Flow -1,110 70 530 730 730 330 730 Use the NPV decision rule to evaluate this project; should it be accepted or rejected?
a) $1,960.41, accept
b) $-527.43, reject
c) $850.41, accept
d) $752.57, accept
Explanation / Answer
c) $850.41, accept Statement showing Cash flows Particulars Time PVf 13% Amount PV Cash Outflows - 1.00 (1,110.00) (1,110.00) PV of Cash outflows = PVCO (1,110.00) Cash inflows 1.00 0.8850 70.00 61.95 Cash inflows 2.00 0.7831 530.00 415.07 Cash inflows 3.00 0.6931 730.00 505.93 Cash inflows 4.00 0.6133 730.00 447.72 Cash inflows 5.00 0.5428 330.00 179.11 Cash inflows 6.00 0.4803 730.00 350.63 PV of Cash Inflows =PVCI 1,960.41 NPV= PVCI - PVCO 850.41
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