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 11 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	-1,040	140	460	660	660	260	660

Use the NPV decision rule to evaluate this project; should it be accepted or rejected?

883.98, accept

796.38, accept

-343.62, reject

1,923.98, accept

Answer 1

Ans 883.98, accept

Accept the project since NPV is positive.

Year	Project Cash Flows (i)	DF@ 11%	DF@ 11% (ii)	PV of Project ( (i) * (ii) )
0	-1040	1	1	(1,040.00)
1	140	1/((1+11%)^1)	0.901	126.13
2	460	1/((1+11%)^2)	0.812	373.35
3	660	1/((1+11%)^3)	0.731	482.59
4	660	1/((1+11%)^4)	0.659	434.76
5	260	1/((1+11%)^5)	0.593	154.30
6	660	1/((1+11%)^6)	0.535	352.86
		NPV		883.98