Question

A firm evaluates all of its projects by applying the NPV decision rule. A project under consideration has the following cash flows:

  

Year	Cash Flow
0	–$	27,900
1		11,900
2		14,900
3		10,900

  

What is the NPV for the project if the required return is 10 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

  

NPV

$

  

At a required return of 10 percent, should the firm accept this project?

No Yes

What is the NPV for the project if the required return is 26 percent? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

  

NPV

$

  

At a required return of 26 percent, should the firm accept this project?

Yes No

Answer 1

Answer :-

a)Net Present Value = $3421.5626

b)Yes, The firm should Accept the project

c)Net Present Value = -$3621.3445

d) No, The firm shouldn't Accept the project

Explanations :-

a)

Net Present Value = Present Value of Cash inflows - Initial Investmnt

Year	Cash Flow	Present Value factor @10%	Present value of cash flow
0	-$27,900	1	-$27900
1	$11900	0.90909	$10818.1818
2	$14900	0.826446	$12314.0495
3	$10900	0.751315	$8189.3313

Present Value of Total Cash inflows = $10818.1818 + $12314.0495 + $8189.3313

   = $31321.5627

Initial Investment = -$27900

Net Present Value = Present Value of Cash inflows - Initial Investmnt

   = $31321.5627 - $27900

Net Present Value = $3421.5626

..

b) Yes ,The firm should Accept the project, because the project have a positive NPV, that means the project will earn more than initial amount with in three years of operation

..

c)

Year	Cash Flow	Present Value factor @10%	Present value of cash flow
0	-$27,900	1	-$27900
1	$11900	0.793651	$9444.4444
2	$14900	0.629882	$9385.2355
3	$10900	0.499906	$5448.9756

Present Value of Total Cash inflows = $9444.4444 + $9385.2355 + $5448.9756

   = $24278.6555

Initial Investment = -$27900

Net Present Value = Present Value of Cash inflows - Initial Investmnt

   = $24278.6555 - $27900

Net Present Value = -$3621.3445

..

d)No, The firm should not Accept the project , because the project have a neagative NPV, that means the project will not earn more than initial amount with in these period