Question

4. Net present value method Underwood Corp. is evaluating a proposed capital budgeting project that will require an initial investment of $168,000. The project is expected to generate the following net cash flows: Year AW N< 2 Cash Flow $44,800 $51,700 $48,600 $47,900 Assume the desired rate of return on a project of this type is 11%. The net present value of this project is -25,096.03 r projects. Should Underwood Suppose Underwood Corp. has enough capital to fund the project, and the project is not competing for fun Corp. accept or reject this project? -21,378.10 Reject the project -18,589.65 -20,448.62 Accept the project

Answer 1

Part 1:
Answer: -$18589.65

Net present value=-Initial cost + Present value of future cash flows
Using the discount rate of 11% and the cash flows given, we get

Net present value=-168000+44800/(1+11%)^1+51700/(1+11%)^2+48600/(1+11%)^3+47900/(1+11%)^4

=-168000+40360.36036+41960.8798+35535.90113+31553.21366
=-18589.645 or -18589.65 (Rounded to 2 decimal places)
So, the net present value of the project is -$18589.65

Part 2:
Answer: Reject the project
As the net present value of the project is negative, it should be rejected.