project that costs $1,800 to install will provide annual cash flows of $530 for
ID: 2731450 • Letter: P
Question
project that costs $1,800 to install will provide annual cash flows of $530 for the next 5 years. The firm accepts projects with payback periods of less than 4 years.
a-1. What is the payback period of the project? (Round your answer to 2 decimal places.)
Payback period years
Yes
What is project NPV if the discount rate is 4%? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.)
No
What is project NPV if the discount rate is 11%? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.)
a-2. Will the project be accepted? NoYes
b-1.What is project NPV if the discount rate is 4%? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.)
NPV $Explanation / Answer
a-1.
Payback period = Initial investment/Annual cash flows = $1,800/$530 = 3.40 years
a-2.
Yes because the payback period is less than 4 years
b-1.
NPV = -Initial investment + Present value of annual cash flows
Present value of annuity = Annuity * {1-(1+r)-n}/r
Present value of annual cash flows = $530*(1-1.04-5)/0.04 = $530*4.4518 = $2,359.45
NPV = -$1,800 + $2,359.45 = $559.45
b-2
Yes, this project should be pursued because NPV is positive.
b-3.
Present value of annual cash flows = $530*(1-1.11-5)/0.11 = $530*3.6959 = $1,958.83
NPV = -$1,800 + $1,958.83 = $158.83
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