6. Last month, Wong Systems Inc. decided to accept the project whose cash flows
ID: 2652871 • Letter: 6
Question
6. 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 = 10.8% New WACC = 9.8%
Select the correct answer.
Year: 0 1 2 3 Cash flows: -$1,000 $500 $500 $500Explanation / Answer
Answer:
Calculation of NPV (At Old WACC 10.8%)
Year
Cash flows
PVF (10.8%)
PV
CF
Calculation
PVF
CF*PVF
0
$ (1,000)
1/(1+0.108)^0
1.00000
$ (1,000.00)
1
$ 500
1/(1+0.108)^1
0.90253
$ 451.26
2
$ 500
1/(1+0.108)^2
0.81456
$ 407.28
3
$ 500
1/(1+0.108)^3
0.73516
$ 367.58
Net Present value (Sum of PVs)
$ 226.12
Calculation of NPV (At Old WACC 10.8%)
Year
Cash flows
PVF (9.8%)
PV
CF
Calculation
PVF
CF*PVF
0
$ (1,000)
1/(1+0.098)^0
1.00000
$ (1,000.00)
1
$ 500
1/(1+0.098)^1
0.91075
$ 455.37
2
$ 500
1/(1+0.098)^2
0.82946
$ 414.73
3
$ 500
1/(1+0.098)^3
0.75543
$ 377.71
Net Present value (Sum of PVs)
$ 247.82
Difference in NPV = 247.82 - 226.12
$ 21.70
Calculation of NPV (At Old WACC 10.8%)
Year
Cash flows
PVF (10.8%)
PV
CF
Calculation
PVF
CF*PVF
0
$ (1,000)
1/(1+0.108)^0
1.00000
$ (1,000.00)
1
$ 500
1/(1+0.108)^1
0.90253
$ 451.26
2
$ 500
1/(1+0.108)^2
0.81456
$ 407.28
3
$ 500
1/(1+0.108)^3
0.73516
$ 367.58
Net Present value (Sum of PVs)
$ 226.12
Calculation of NPV (At Old WACC 10.8%)
Year
Cash flows
PVF (9.8%)
PV
CF
Calculation
PVF
CF*PVF
0
$ (1,000)
1/(1+0.098)^0
1.00000
$ (1,000.00)
1
$ 500
1/(1+0.098)^1
0.91075
$ 455.37
2
$ 500
1/(1+0.098)^2
0.82946
$ 414.73
3
$ 500
1/(1+0.098)^3
0.75543
$ 377.71
Net Present value (Sum of PVs)
$ 247.82
Difference in NPV = 247.82 - 226.12
$ 21.70
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