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 3.5 and 4.5 years, respectively. Cnsn tow $ 100 $1240 $22$1640 $1,640 $1.540 $1:240 Time: $5,100 $1,240 $2,440 $1,640 $1,640 $1,440 $1,240 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.) NPV Should it be accepted or rejected? Accepted Rejected

Explanation / Answer

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=1240/1.07+2440/1.07^2+1640/1.07^3+1640/1.07^4+1440/1.07^5+1240/1.07^6

=$7732.91

NPV=Present value of inflows-Present value of outflows

=$7732.91-$5100

=$2632.91(Approx)

Hence since NPV is positive;the project should be accepted.

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