A project that costs $2,600 to install will provide annual cash flows of $610 fo
ID: 2724859 • Letter: A
Question
A project that costs $2,600 to install will provide annual cash flows of $610 for the next 5 years. The firm accepts projects with payback periods of less than 4 years.
What is this project's payback period?
Will the project be accepted?
What is project NPV if the discount rate is 4%?
What is project NPV if the discount rate is 9%?
a1.What is this project's payback period?
a-2.Will the project be accepted?
b1.What is project NPV if the discount rate is 4%?
b3.What is project NPV if the discount rate is 9%?
b-5. Will the firm’s decision change as the discount rate changes?Explanation / Answer
Project cost = $ 2,600
annual cash flows are $ 610 for 5 years
payback period = cash outlay/cash inflow
2600/610=4.26 years
so the payback period is more than 4 years the project will not be accepted.
NPV of the project at 4% discount rate=
-$ 2,600+$ 610(PVIFA ( 4%, 5)
-$ 2,600+610( 4.452) -$ 2600+2715.72= $ 115.72
NPV at 9% -$ 2600+610(3.890)
-$ 2600+2372.90= -$ 227.10
YES the firms decision changes when the discount rate changes because there is nagitive NPV at 9% discount rate
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