1. Which of the following comes closest to the net present value (NPV) of a proj
ID: 2731952 • Letter: 1
Question
1. Which of the following comes closest to the net present value (NPV) of a project whose initial investment is $5 and which produces two cash flows: the first at the end of year 2 of $3 and the second at the end of year 4 of $7? The required rate of return is 10%? a. $1.64 b. $1.84 c. $2.05 d. $2.26 e. $0 2. Consider Project Theta, its time line of cash flows, and one of the project IRRs: Year..................0...........1...........2............IRR Cash Flow.......($200).....$850....($700).......15% What is the best decision for Project Theta (accept or reject) if the project’s required rate of return is 15% and why? a. Accept the project because the payback is short b. Reject the project because the IRR is less than the required rate of return c. Accept the project because the IRR is greater than zero d. Reject the project because the NPV is less than zero e. Accept the project because the NPV is greater than zeroExplanation / Answer
Answer 1 : Answer 'd' is correct. That is $ 2.26.
Answer 2 : Answer 'e' is correct. that is Accept the project because the NPV is greater than zero.
Cash flow at end of year 2 3 PVIF 10%, 2 0.826 PV of cash Flow 2.478 at end of year 4 7 PVIF 10%, 4 0.683 PV of cash Flow 4.781 Total PV of cash Flow 7.259 Less Intial investment 5.00 NPV of the project 2.26
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