compute the p1 statistic for project z and advise the firm whether to accept or

ID: 2723704 • Letter: C

Question

compute the p1 statistic for project z and advise the firm whether to accept or reject the project with the cash flows shown as follows if the appropriate cost of capitals is 10 percent. Project Z Time 0 to -$1,000 Time 1 to $350 Time 2 to $380 Time 3 to $420 Time 4 to $300 Time 5 to $100 a. project's p1 is 8.48 % and the project should be accepted b. project's p1 is 8.48% and should be rejected c. project's p1 is 16.48% and the project should be accepted d. project's p1 is 21.48% and should be accepted

Explanation / Answer

Year

Cash flow

Present value factor @ 10%

Present value of cash flows

-$ 1,000.00

$ 350.00

1.1000

$ 318.18

$ 380.00

1.2100

$ 314.05

$ 420.00

1.3310

$ 315.55

$ 300.00

1.4641

$ 204.90

$ 100.00

1.6105

$ 62.09

$ 214.77

Net present value = $214.77

P1 Statistic = Net present value/Initial cash flow = $214.77/$1000 = 0.21477 = 21.48%

Hence answer is d. project's p1 is 21.48% and should be accepted.