A project that provides annual cash flows of $17,900 for nine years costs $85,00
ID: 2780488 • Letter: A
Question
A project that provides annual cash flows of $17,900 for nine years costs $85,000 today. What is the NPV for the project if the required return is 8 percent? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.) NPV $ At a required return of 8 percent, should the firm accept this project? Accept Reject What is the NPV for the project if the required return is 20 percent? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV $ At a required return of 20 percent, should the firm accept this project? Accept Reject At what discount rate would you be indifferent between accepting the project and rejecting it? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Explanation / Answer
the NPV for the project if the required return is 8 percent
=-85000+17900/(1+8%)^1+17900/(1+8%)^2+17900/(1+8%)^3+17900/(1+8%)^4+17900/(1+8%)^5+17900/(1+8%)^6+17900/(1+8%)^7+17900/(1+8%)^8+17900/(1+8%)^9
=26819.29
As NPV is higher than 0, the project should be accepted
the NPV for the project if the required return is 20 percent
=-85000+17900/(1+20%)^1+17900/(1+20%)^2+17900/(1+20%)^3+17900/(1+20%)^4+17900/(1+20%)^5+17900/(1+20%)^6+17900/(1+20%)^7+17900/(1+20%)^8+17900/(1+20%)^9
=-12845.70
As NPV is lower than 0, the project should be rejected.
At what discount rate would you be indifferent between accepting the project and rejecting it
that rate will be when NPV=0
for this we can used IRR function in excel to find where NPV=0
so answer is interest rate of 15.14%.
the above are the answers
Year CF 0 -85000 1 17900 2 17900 3 17900 4 17900 5 17900 6 17900 7 17900 8 17900 9 17900 IRR 15.14%Related Questions
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