irm evaluates all of its projects by applying the NPV decision rule. A project u

Question

irm evaluates all of its projects by applying the NPV decision rule. A project under consideration has the following cash flows: Year Cash Flow 0 $28,000 12,000 15,000 11,000 What is the NPV of the project if the required return is 11 percent? (Do not round intermediate calculations and round your final answer to 2 decimal places.(e.g. 32.16) NPV At a required return of 11 percent, should the firm accept this project? O No Yes What is the NPV of the project if the required return is 25 percent? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16) NPV At a required return of 25 percent, should the firm accept this project? O Yes No

Explanation / Answer

NPV can be calculated on a financial calculator, excel or using formulas

NPV = -CF0 + CF1 / (1 + r)^1 + CF2 / (1 + r)^2 + CF3 / (1 + r)^3

CF0 = -28,000, CF1 = 12,000, CF2 = 15,000, CF3 = 11,000

With r = 11% => NPV = $3,028.25

The firm should accept the project as NPV > 0

With r = 25% => NPV = - $3,168.00

The should not accept the project as NPV < 0

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