Dennis wants to determine if the discount rate really makes any difference in th

Question

Dennis wants to determine if the discount rate really makes any difference in the net present value of a project. He feels that if a project is acceptable at one rate of return, it will be acceptable at all rates of return. To explain why his thinking is incorrect, 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 $22,500 each. What is net present value at a discount rate of 12 percent and 17 percent?

Explanation / Answer

1

2

3

4 =2 x 3

year

Cash flows

Pvcaf-12%

value

0

-71000

1

-71000

1 - 4

17500

3.3073

57877.75

5-6

22500

1.0741

24167.25

Net value= 11045

1

2

3

4 =2 x 3

year

Cash flows

Pvcaf-17%

value

0

-71000

1

-71000

1 - 4

17500

2.7432

48006

5-6

22500

0.846

19035

Net value= -3959

1

2

3

4 =2 x 3

year

Cash flows

Pvcaf-12%

value

0

-71000

1

-71000

1 - 4

17500

3.3073

57877.75

5-6

22500

1.0741

24167.25

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