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 10 percent, and that the maximum allowable payback and discounted payback statistic for the project are 2 and 3 years, respectively.

600

Use the NPV decision rule to evaluate this project; should it be accepted or rejected?

$835.86, accept

$1,835.86, accept

$759.87, accept

$-240.13, reject

600

Explanation / Answer

$835.86, accept Statement showing Cash flows Particulars Time PVf 10% Amount PV Cash Outflows                                -                        1.00            (1,000.00)            (1,000.00) PV of Cash outflows = PVCO            (1,000.00) Cash inflows                            1.00                  0.9091                  200.00                  181.82 Cash inflows                            2.00                  0.8264                  400.00                  330.58 Cash inflows                            3.00                  0.7513                  600.00                  450.79 Cash inflows                            4.00                  0.6830                  600.00                  409.81 Cash inflows                            5.00                  0.6209                  200.00                  124.18 Cash inflows                            6.00                  0.5645                  600.00                  338.68 PV of Cash Inflows =PVCI              1,835.86 NPV= PVCI - PVCO                  835.86

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