Consider an investment with an immediate outflow of $5,000 followed by annual inflows of $1,500 for the next four years. If the firm has a 10% cost of capital, what is the project’s NPV and should they accept the project?
a. NPV = $1,000; accept the project
b. NPV = -$245; accept the project
c. NPV = $1,000; reject the project
d. NPV = -$245; reject the project
Which of the following is NOT a potential pitfall of using the payback period as a tool for making capital budgeting decisions?
a. the payback period depends on an arbitrary length of time
b. the payback period does not explicitly account for risk
c. the payback period does not incorporate the time value of money
d. the payback period does not include the value of cash flows after the initial investment if returned
1.
NPV=-5000+1500/10%*(1-1/1.1^4)=-245.2018305
d. NPV = -$245; reject the project
2.
a. the payback period depends on an arbitrary length of time
Consider an investment with an immediate outflow of $5,000 followed by annual inflows of $1,500 for the next four years....
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