Last month, Lloyd\'s Systems analyzed the project whose cash flows are shown bel

Question

Last month, Lloyd's Systems analyzed the project whose cash flows are shown below. However, before the decision to accept or reject the project took place, the Federal Reserve changed interest rates and therefore the firm's WACC. The Fed's action did not affect the forecasted cash flows. By how much did the change in the WACC affect the project's forecasted NPV? Note that a project's expected NPV can be negative, in which case it should be rejected. Old WACC: 10.00% New WACC: 11.25% Year 0 1 2 3 Cash flows -$1,000 $410 $410 $410 Answer -$18.89 -$19.88 -$20.93 -$22.03 -$23.13

Explanation / Answer

Old WACC: 10.00% NPV = $19.61 New WACC: 11.25% NPV = ($2.42) negative The change had a negative $22.03 in cash flow. Since the project now has a negative cash flow, it should be rejected.

Related Questions

Navigate

• Browse (All)
• Browse L
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.