Question

newconnect.mheducation.com Cash Flow - Part 2 Chapter 5 - DCF & Interest Rates - Part 3 Chapter 8 PV & Investment Criteria i Saved A project that will provde annual cash flows of $2,350 for nine years costs $9,700 today, a. At a required return of 12 percent, what is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g. 32.16.) b. At a required return of 28 percent, what is the NPV of the project? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) c. At what discount rate would you be indifferent between accepting the project and rejecting it? (Do not round Intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a. NPV b. NPV c. Discount rateſ Prev 1 of 7 Nex

Answer 1

a. The NPV of a project is the PV of the outflows minus the PV of the inflows. Since the cash inflows are an annuity, the equation for the NPV of this project at an 12 percent required return is:

NPV = – $9,700 + $2,350(PVIFA_{12%, 9})

NPV = $2,821.39

At an 12 percent required return, the NPV is positive, so we would accept the project.

b. The equation for the NPV of the project at a 28 percent required return is:

NPV = – $9,700 + $2,350(PVIFA_{28%, 9})

NPV = –$2,217.10

At a 28 percent required return, the NPV is negative, so we would reject the project.

c. We would be indifferent to the project if the required return was equal to the IRR of the project, since at that required return the NPV is zero. The IRR of the project is:

0 = – $9,700 + $2,350(PVIFA_{IRR, 9})

IRR = 0.1926 or 19.26%