Dennis wants to determine if the discount rate really makes anydifference in the

Question

Dennis wants to determine if the discount rate really makes anydifference in the net present value of a project. He feels that ifa project is acceptable at one rate of return, it will beacceptable at all rates of return. To explain why his thinking isincorrect, you are creating an example to illustrate your point.The cash flows you are using are as follows: time zero is -$71,000,years 1 through 4 are $17,500 each, and years 5 and 6 are $22,500each. The net present value at a discount rate of 12 percent is_____ as compared to _____ at 17 percent.

Explanation / Answer

Yes the discount rate makes difference in the netpresent value (NPV). NPV will have positive value at one rate and havenegative value at one rate so we can not accept the project at allrates. For example: 1 2 3 4=2*3 Year Cash flows PVCAF (at12%) Present value of cash flows 0 -71000 1 -71000 1 to 4 17500 3.3073 57877.75 5 to 6 22500 1.0741 24167.25 Net present value 11045 1 2 3 4=2*3 Year Cash flows PVCAF ( at 17%) Present value of cash flows 0 -71000 1 -71000 1 to 4 17500 2.7432 48006 5 to 6 22500 0.846 19035 Net present value -3959 Here the Net present values of the project is positiveat 12% but negative at 17% so we can accept the project at 12%only. Yes the discount rate makes difference in the netpresent value (NPV). NPV will have positive value at one rate and havenegative value at one rate so we can not accept the project at allrates. For example: 1 2 3 4=2*3 Year Cash flows PVCAF (at12%) Present value of cash flows 0 -71000 1 -71000 1 to 4 17500 3.3073 57877.75 5 to 6 22500 1.0741 24167.25 Net present value 11045 1 2 3 4=2*3 Year Cash flows PVCAF ( at 17%) Present value of cash flows 0 -71000 1 -71000 1 to 4 17500 2.7432 48006 5 to 6 22500 0.846 19035 Net present value -3959 Here the Net present values of the project is positiveat 12% but negative at 17% so we can accept the project at 12%only.

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