1) The cost of a project is $500,000 and the present value of the net cash inflo

Question

1) The cost of a project is $500,000 and the present value of the net cash inflows is $625,000. What is the increase in value of the firm as a result of accepting the project. 2) A project has an initial outlay of $100,000, a cash inflow of $133,000 at the end of three years, and an IRR of 10%. At a discount rate of 10% what is the NPV? 3) You are choosing between mutually exclusive projects A and B. Project A has a NPV of $10,000 and an IRR of 15%. Project B has a NPV of $6,500 and an IRR of 23%. Which project should be selected? 4) When projecting cash flows into the future and calculating net present values(NPV), the manager should NOT adjust the cash flows for inflation. What do you think and why?

Explanation / Answer

1) 625000-500000= 125000 2) -100000 +133000(1.1^-3)= -75.13 3)One should chose Project A, because it gives a higher return with a lower interest rate. 4) No. One should always adjust for inflation as it is imminent.

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