ABC Company analyzed the project whose cash flows are shown below. However, befo

Question

ABC Company analyzed the project whose cash flows are shown below. However, before the compay decides to accept or reject the project, the central bank changed policy interest rates and therefore the firm's required rate of return (WACC). The central bank's action did not change the forecasted cash flows. By how much did the change in the required return (WACC) affect the project's forecasted NPV?

Old Required Rate:

10.00%

New Required Rate:

12.50%

Year

0

1

2

3

Cash flows

-$1,000

$410

$410

$410

-$43.26

-$44.12

-$47.15

-$48.02

-$39.80

Old Required Rate:

10.00%

New Required Rate:

12.50%

Year

0

1

2

3

Cash flows

-$1,000

$410

$410

$410

Explanation / Answer

Answer: Option 1

The change in NPV due to change in WACC is = -23.67 - $19.59 = -$43.26 (ans)

in$ Year Cash flows Discount factor @10% Discounted cashflow 0 -1000 1 -1000 1 410 0.9091 372.73 2 410 0.8264 338.82 3 410 0.7513 308.03 NPV = 19.588

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