Question

Consider Project Theta, its time line of cash flows, and one of the project IRRs: Year...................0..............1...............2...........IRR Cash Flow.....($200).....$850.......($700).......15% What is the best decision for Project Theta (accept or reject) if the project’s required rate of return is 15% and why?

	a.	Reject the project because the NPV is less than zero
	b.	Accept the project because the IRR is greater than zero
	c.	Accept the project because the NPV is greater than zero
	d.	Accept the project because the payback is short
	e.	Reject the project because the IRR is less than the required rate of return

Answer 1

NPV = Present value of cash inflows - Present value of cash outflows

= -200+850/1.15 - 700/(1.15)^2

= $9.83

Decision Rule for NPV is that the project should be accepted if NPV is positive

and If IRR is greater than the cost of capital

Hence, the answer is c.

Accept the project because the NPV is greater than zero