A project that provides annual cash flows of $17,000 for ten years costs $76,000

Question

A project that provides annual cash flows of $17,000 for ten years costs $76,000 today.

What is the NPV for the project if the required return is 9 percent? (Round your answer to 2 decimal places. (e.g., 32.16))

At a required return of 9 percent, should the firm accept this project?

What is the NPV for the project if the required return is 21 percent? (Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places. (e.g., 32.16))

At a required return of 21 percent, should the firm accept this project?

At what discount rate would you be indifferent between accepting the project and rejecting it? (Round your answer to 2 decimal places. (e.g., 32.16))

A project that provides annual cash flows of $17,000 for ten years costs $76,000 today.

Explanation / Answer

Rate of return = 9%

Cash flow: -$76,000 today ; $17000 yearly for the next ten years

NPV = -76,000 + 17000[ (1.09)^(-1) + (1.09)^(-2) + ......+ (1.09)^(-10)] = $ 33,100.18

Since NPV at 9% is quite positive, The firm should accept the project.

When, required return is 21%

NPV = -76,000 + 17000[ (1.21)^(-1) + (1.21)^(-2) + ......+ (1.21)^(-10)] = - $ 7,080.67

Since NPV at 21% is quite negative, The firm should not accept the project.

The discount rate at which the NPV of the project is Zero is the rate at which one would be indifferent as to accept or reject the project. Let that required rate be "r%", then:

0 = -76,000 + 17000[ (1+r)^(-1) + (1+r)^(-2) + ......+ (1+r)^(-10)]

Solving the above equation, R = 18.15 %

At 18.15 % discount rate, one would be indifferent between accepting the project and rejecting it

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

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