5. A project that provides annual cash flows of $18,000 for ten years costs $86,

Question

5.

A project that provides annual cash flows of $18,000 for ten years costs $86,000 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.)

At a required return of 9 percent, should the firm accept this project?

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.)

At a required return of 21 percent, should the firm accept this project?

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.)

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.)

Explanation / Answer

Cash outflow at year 0 =86000

Cash inflow for 10 years = 18000

Calculation of NPV @ 9% required rate of return

NPV = Present value of cash inflows - Present value of cash outflows

NPV = 18000*PVAF ( 9%, 10 years) -86000

= (18000*6.418)-86000

= 29518

The project should be accepted at required rate of return of 9% as NPV is positive

Calcualtion of NPV @ 21% required rate of return

NPV = 18000*PVAF( 21%,10 years) -86000

= (18000*4.054)-86000

= -13026

Project should not be accepted at required rate of return of 21% as NPV of the project is negative

Indifferent rate is the rate at which the NPV of the project is zero . NPV of the project is positive at 9% and NPV of the project is negative at 21% .

Indifferent rate = 9%+8.33%

= 17.33%

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