Classlist Content AssignmentsQuizzes Discussions Grades Attendance M Chapter 11

Question

Classlist Content AssignmentsQuizzes Discussions Grades Attendance M Chapter 11 Est, Length:2:00:00 Nina Thornhil Attempt 1 Question 13 (1 point) Last month, Lloyd's Systems analyzed the project whose cash flows are shown below. However, before the decision to accept or reject the project, the Federal Reserve took actions that changed interest rates and therefore the firm's WACC. The Fed's action did not affect the forecasted cash flows. By how much did the change in the WACC affect the project's forecasted NPV? Note that a project's projected NPV can be negative, in which case it should be rejected New WACC; : 9.50% Old WACC: Year Cash flows 10.00% $1,000 $410 $410 $410 0$9,04 0$11.12 0$10.22 0$10,85 0$10.13 Save

Explanation / Answer

Cash Flows:

Year 0 = -$1,000
Year 1 = $410
Year 2 = $410
Year 3 = $410

Old WACC = 10.00%
New WACC = 9.50%

NPV at Old WACC = -$1,000 + $410/1.10 + $410/1.10^2 + $410/1.10^3
NPV at Old WACC = $19.61

NPV at New WACC = -$1,000 + $410/1.095 + $410/1.095^2 + $410/1.095^3
NPV at New WACC = $28.65

Change in NPV = NPV at New WACC - NPV at Old WACC
Change in NPV = $28.65 - $19.61
Change in NPV = $9.04

So, NPV will increase by $9.04

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