A firm evaluates all of its projects by applying the NPV decision rule. A projec
ID: 2733376 • Letter: A
Question
A firm evaluates all of its projects by applying the NPV decision rule. A project under consideration has the following cash flows: What is the NPV for the project if the required return is 12 percent'? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) At a required return of 12 percent, should the firm accept this project? Yes No What is the NPV for the project if the required return is 24 percent'? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 7 decimal places, e.g., 32.16.) At a required return of 24 percent, should the firm accept this project? Yes NoExplanation / Answer
NPV (Net Present Value) is the difference between present value of cash inflows and present value of cash outflows.
Deciding between more than one project: Project whose NPV is highest should be accepted.
Decision to accept a project: Project should be accepted if NPV is positive.
Calculation of NPV of the project if the required return is 12%:
Year
Cash Flow
PVF (12%)
PV of Cash Flow
0
-$28400
1
-$28400
1
$12400
0.8928
$11070.72
2
$15400
0.7972
$12276.88
3
$11400
0.7118
$8114.52
$3062.12
NPV of the project = $3062.12
Since NPV is positive, project should be accepted.
Correct Option is Yes
Calculation of NPV of the project if the required return is 24%:
Year
Cash Flow
PVF (24%)
PV of Cash Flow
0
-$28400
1
-$28400
1
$12400
0.8064
$10000
2
$15400
0.6504
$10016.16
3
$11400
0.5245
$5979.30
-$2404.54
NPV of the project = -$2404.54
Since NPV is negative, project should not be accepted.
Correct Option is No
Year
Cash Flow
PVF (12%)
PV of Cash Flow
0
-$28400
1
-$28400
1
$12400
0.8928
$11070.72
2
$15400
0.7972
$12276.88
3
$11400
0.7118
$8114.52
$3062.12
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