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 9 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively. Time: Cash flow 2 4 -$4,900 $1,220 $2,420 $1,620 $1,620 $1,420 $1,220 Use the NPV decision rule to evaluate this project.(Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your final answer to 2 decimal places.) NPV Should it be accepted or rejected? Accepted Rejected

Explanation / Answer

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

=1220/1.09 +2420/1.09^2+1620/1.09^3+1620/1.09^4+1420/1.09^5+1220/1.09^6

=$7205.07

NPV=Present value of inflows-Present value of outflows

=$7205.07-$4900

=$2305.07(Approx)

Hence since NPV is positive;the project should be accepted.

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