Question

There is a project whose cash flows are shown below.

• Before the investor decided to accept or reject the project, interest rates are changed, and thus, the cost of capital (r) is also changed.
• The change in the interest rate did not affect the forecasted cash flows.
• By how much did the change in the r affect the project's forecasted NPV?
• Note that a project's expected NPV can be negative, in which case it should be rejected.

Old r:	8.00%	New r:	11.25%
Year	0	1	2	3
Cash flows	−$1,000	$410	$410	$410

Answer 1

Project
Discount rate	0.08
Year	0	1	2	3
Cash flow stream	-1000	410	410	410
Discounting factor	1	1.08	1.1664	1.259712
Discounted cash flows project	-1000	379.6296	351.5089	325.4712
NPV = Sum of discounted cash flows
NPV Project =	56.61
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

Project
Discount rate	0.1125
Year	0	1	2	3
Cash flow stream	-1000	410	410	410
Discounting factor	1	1.1125	1.237656	1.376893
Discounted cash flows project	-1000	368.5393	331.2713	297.772
NPV = Sum of discounted cash flows
NPV Project =	-2.42
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

Change in NPV = 56.61-(-2.42) = 59.03

NPV decreased by 59.03