Last month, Wong Systems Inc. decided to accept the project whose cash flows are
ID: 2635910 • Letter: L
Question
Last month, Wong Systems Inc. decided to accept the project whose cash flows are shown below. However, before actually starting the project, the Federal Reserve took actions that changed interest rates and Wong's WACC. By how much did the change in the WACC affect the project's forecasted NPV? Assume that the Fed action will not affect the cash flows, and note that a project's projected NPV can be negative, in which case it should be rejected.
Old WACC = 9.7% ??????New WACC = 8.7%
Select the correct answer.
Year: 0 1 2 3 Cash flows: -$1,000 $500 $500 $500Explanation / Answer
NPV = -1000 + 500/1.097 + 500/1.097^2 + 500/1.097^3
= 250.02
new nPV = -1000 + 500/1.087 + 500/1.087^2 + 500/1.087^3
= 272.44
change = 22.42
hence B is answer
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.