Suppose your firm is considering investing in a project with the cash flows show

Question

Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 9 percent, and that the maximum allowable payback and discounted payback statistics for the project are 2.0 and 3.0 years, respectively. Time: 0 1 2 3 4 5 6 Cash flow –$7,000 $1,130 $2,330 $1,530 $1,530 $1,330 $1,130 Use the NPV decision rule to evaluate this project.(Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your final answer to 2 decimal places.)

Explanation / Answer

Reject project as NPV is negative

Discount rate 9.000% Year 0 1 2 3 4 5 6 Cash flow stream -7000 1130 2330 1530 1530 1330 1130 Discounting factor 1 1.09 1.1881 1.295029 1.411582 1.538624 1.6771 Discounted cash flows project -7000 1036.697 1961.114 1181.441 1083.891 864.4087 673.7821 NPV = Sum of discounted cash flows NPV = -198.67 Discounting factor = (1 + discount rate)^(CORRESPONDING PERIOD IN YEARS) Discounted Cashflow= Cash flow stream/discounting factor

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