A project that provides annual cash flows of $11,700 for nine years costs $63,00

Question

A project that provides annual cash flows of $11,700 for nine years costs $63,000 today. What is the NPV for the project if the required return is 8 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV 10,088.59 2 decimal places required. At a required return of 8 percent, should the firm accept this project? Accept O Reject What is the NPV for the project if the required return is 20 percent? (A negative answer 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 15,837.69 2 decimal places required. At a required return of 20 percent, should the firm accept this project? Accept O Reject

Explanation / Answer

Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

1.Present value of annuity=11700[1-(1.08)^-9].0.08

=$11700*6.246887911

=$73088.59

NPV=Present value of inflows-Present value of outflows

=$73088.59-$63000

=$10088.59(Approx).

Hence since NPV is positive;project must be acepted.

2.Present value of annuity=11700[1-(1.2)^-9].0.2

=$11700*4.030966503

=$47162.31

NPV=Present value of inflows-Present value of outflows

=$47162.31-$63000

=$(15837.69)(Approx).(Negative).

Hence since NPV is negative;project must be rejected.

3.Let discount rate be x%
At irr,present value of inflows=present value of outflows.

63000=11700/1.0x+11700/1.0x^2+...........+11700/1.0x^9

Hence x=discount rate=11.72%(Approx).

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.