A firm evaluates all of its projects by applying the NPV decision rule. A projec

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 $27,800 11,800 14,800 10,800 2 3 What is the NPV for the project if the required return is 11 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV At a required return of 11 percent, should the firm accept this project? O Yes What is the NPV for the project if the required return is 25 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 25 percent, should the firm accept this project? O Yes ?No

Explanation / Answer

1.

NPV = Sum of (Present values of the future cash flow)

NPV = -27800/1.11^0 + 11800/1.11^1 + 14800/1.11^2 + 10800/1.11^3

NPV = $2,739.51

2. Yes

At 11% required rate, NPV is positive hence accept the project.

3.

NPV = Sum of (Present values of the future cash flow)

NPV = -27800/1.25^0 + 11800/1.25^1 + 14800/1.25^2 + 10800/1.25^3

NPV = -$3,358.40

4. No

At 25% required rate, NPV is negative hence do not accept the project.

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