A project that provides annual cash flows of $17,000 for ten years costs S76,000

Question

A project that provides annual cash flows of $17,000 for ten years costs S76,000 today. What is the NPV for the project if the required return is 9 percent? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.) NPV At a required return of 9 percent, should the firm accept this project? O Accept O Reject What is the NPV for the project if the required return is 21 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 21 percent, should the firm accept this project? O Accept O Reject At what discount rate would you be indifferent between accepting the project and rejecting it? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Discount rate

Explanation / Answer

Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

1.Present value of inflows=$17000[1-(1.09)^-10]/0.09

=$17000*6.417657701

=$109100.18

NPV=Present value of inflows-Present value of outflows

=$109100.18-$76000

=$33100.18(Approx).

Hence since NPV is positive;project must be accepted.

2.Present value of inflows=$17000[1-(1.21)^-10]/0.21

=$17000*4.054077962

=$68919.33

NPV=Present value of inflows-Present value of outflows

=$68919.33-$76000

=$(7080.67)(Approx).(Negative).

Hence since NPV is negative;project must be rejected.

c.

Let discount rate be x%

At this discount rate;present value of inflows=present value of outflows.

76000=17000/1.0x+17000/1.0x^2+..............+17000/1.0x^10

Hence x=discount rate=18.15%(Approx).

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