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 12 percent, and that the maximum allowable payback and discounted payback statistic for the project are 2 and 3 years, respectively Time Cash Flow 0 1 2 3 4 5 6 -1,150 30570770770 370770 Use the NPV decision rule to evaluate this project, should it be accepted or rejected? Multiple Choice 0 $968.66, accept o '$-495.13, reject $864.87, accept

Answer 1

A. $968.66 ACCEPT

NPV = PRESENT VALUE OF CASH INFLOWS - PRESENT VALUE OF CASH OUTFLOWS

PRESENT VALUE OF CASH INFLOWS @12% = 30* 1/1.12 + 570* 1/1.12² + 770* 1/1.12³ + 770* 1/1.12⁴ + 370* 1/1.12⁵+ 770* 1/1.12⁶ = $2118.659

PRESENT VALUE OF CASH OUTFLOW (given) = $1150

THEREFORE NPV = $2118.659 - $1150 = $968.66 (ROUNDED OFF) and proposal can be accepted.