Suppose your firm is considering investing in a project with the cash flows show
ID: 2619054 • Letter: S
Question
Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 14 percent, and that the maximum allowable payback and discounted payback statistic for the project are 2 and 3 years, respectively.
690
Use the NPV decision rule to evaluate this project; should it be accepted or rejected?
$802.77, accept
$1,812.77, accept
$704.18, accept
$-555.82, reject
Time 0 1 2 3 4 5 6 Cash Flow -1,010 110 490 690 690 290690
Explanation / Answer
Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)
=110/1.14+490/1.14^2+690/1.14^3+690/1.14^4+290/1.14^5+690/1.14^6
=$1812.77
NPV=Present value of inflows-Present value of outflows
=$1812.77-$1010
=$802.77(Approx).
Hence since NPV is positive;project must be accepted.
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