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 7 percent, and that the maximum allowable payback and discounted payback statistics for the project are 2.0 and 3.0 years, respectively.

  

      

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.)

   

   

  Time: 0 1 2 3 4 5 6   Cash flow –$7,200 $1,110 $2,310 $1,510 $1,510 $1,310 $1,110

Explanation / Answer

NPV = ($ 86.74)

Since NPV is negative, the project must be rejected

Year Project Cash Flows (i) DF@ 7% (ii) PV of Project A ( (i) * (ii) ) 0 -7200 1                      (7,200.00) 1 1110 0.935                       1,037.38 2 2310 0.873                       2,017.64 3 1510 0.816                       1,232.61 4 1510 0.763                       1,151.97 5 1310 0.713                           934.01 6 1110 0.666                           739.64 CASH INFLOW                           (86.74)

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