A firm evaluates all of its projects by applying the NPV decision rule. A projec
ID: 2818018 • Letter: A
Question
A firm evaluates all of its projects by applying the NPV decision rule. A project under consideration has the following cash flows:
What is the NPV for the project if the required return is 11 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Yes
No
What is the NPV for the project if the required return is 25 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.)
Yes
No
A firm evaluates all of its projects by applying the NPV decision rule. A project under consideration has the following cash flows:
Explanation / Answer
CALCULATION OF THE PRESENT VALUE OF THE CASH FLOW INTEREST RATE @ 11%; So Discounting factor is also 11% Year Cash Flow PVF of $ 1 @11% Present Value (Cash Flow X PVF ) 0 $ -28,600.00 1.0000 $ -28,600.00 1 $ 12,600 0.9009 $ 11,351.35 2 $ 15,600 0.8116 $ 12,661.31 3 $ 11,600 0.7312 $ 8,481.82 Total Present Value $ 3,894.48 Net present Value of the Project @ 11% = $ 3,894.48 Net present value is the positive so the Firm should accept this project. Should Firm Accept the Project = Yes CALCULATION OF THE PRESENT VALUE OF THE CASH FLOW INTEREST RATE @ 25%; So Discounting factor is also 25% Year Cash Flow PVF of $ 1 @25% Present Value (Cash Flow X PVF ) 0 $ -28,600.00 1.0000 $ -28,600.00 1 $ 12,600 0.8000 $ 10,080.00 2 $ 15,600 0.6400 $ 9,984.00 3 $ 11,600 0.5120 $ 5,939.20 Total Present Value $ -2,596.80 Net present Value of the Project @ 25% = $ -2,596.80 Net present value is the Negative so the Firm should not accept this project. Should Firm Accept the Project = No
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