1. Calliope Industries is evaluating a capital project with the following cash f

Question

1.     Calliope Industries is evaluating a capital project with the following cash flows: Year 1, $500; Year 2, $730; Year 3, $960; Year 4, $1,290, and Year 5, $1,740.  The project is expected to cost $3,290 and the firm%u2019s cost of capital is 9.75%. What is the net present value of the project?  Should Calliope accept this project?  What if the cost of capital were 12.25%?  What is the NPV?  Accept or reject the project?

Calliope Industries is evaluating a capital project with the following cash flows: Year 1, $500; Year 2, $730; Year 3, $960; Year 4, $1,290, and Year 5, $1,740. The project is expected to cost $3,290 and the firm%u2019s cost of capital is 9.75%. What is the net present value of the project? Should Calliope accept this project? What if the cost of capital were 12.25%? What is the NPV? Accept or reject the project?

Explanation / Answer

NPV = -3290 + 500/1.0975 + 730/1.0975^2 + 960/1.0975^3 + 1290/1.0975^4 + 1740/1.0975^5 = 479.748

since NPV is positive accept the project

at 12.25%

NPV = -3290 + 500/1.1225 + 730/1.1225^2 + 960/1.1225^3 + 1290/1.1225^4 + 1740/1.1225^5 = 202.466

since NPV is positive accept the project

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