Question

Consider the case of Rydell Engineering:

Rydell Engineering is evaluating a proposed capital budgeting project that will require an initial investment of $124,000. The project is expected to generate the following net cash flows:

Year	Cash Flow
Year 1	$38,200
Year 2	$50,600
Year 3	$45,300
Year 4	$42,400

Assume the desired rate of return on a project of this type is 10%. What is the net present value of this project? (Note: Do not round your intermediate calculations.)

A) $26,719.70

B) –$15,358.30

C) $15,539.79

D) $7,505.40

Suppose Rydell Engineering has enough capital to fund the project, and the project is not competing for funding with other projects. Should Rydell Engineering accept or reject this project?

A) Reject the project

B) Accept the project

Answer 1

Solution:
1st	Answer is C)	$15,539.79
2nd	Answer is B)	Accept the project
	The project should be accepted as its Net present value of all cash flow is positive means it is able to generate more cash than its required rate of return of 10% as the cash flows of the project is already discounted at 10% . And there is no limitation of capital so it would not affect other project by accepting this project .
Notes:
Working Notes:
	We calculate net present value the project as follows:
	I	II	III = I x II
Year	Cash flows	PVF @ 10% required rate of returns	Present Value
0	-124,000	1	-124,000.00
	initial outflows so -ve
1	38200	0.909090909	34,727.27
2	50600	0.826446281	41,818.18
3	45300	0.751314801	34,034.56
4	42400	0.683013455	28,959.77
		Net present Value	15,539.79
Notes: PVF is calculated @ r% = 1/(1+r%)^n     where n is the period for which PVF is calculated. For year 1 and required rate of return 10%    = 1/(1 + 10%)^1
Please feel free to ask if anything about above solution in comment section of the question.