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Suppose your firm is considering investing in a project with the cash flows shown below, that...

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Finance

Suppose your firm is considering investing in a project with thecash flows shown below, that the required rate of return onprojects of this risk class is 8 percent, and that the maximumallowable payback and discounted payback statistics for the projectare 3.5 and 4.5 years, respectively.

Time:0123456
Cash flow:–$4,900$1,260$2,460$1,660$1,660$1,460$1,260

Use the NPV decision rule to evaluate this project.(Do not round intermediate calculationsand round your final answer to 2 decimalplaces.)

NPV__________

Should it be accepted or rejected?

  • accepted

  • rejected

Answer & Explanation Solved by verified expert
3.9 Ratings (631 Votes)

Year Cashflow PVF@8% Cashflow*PVF
0                      (4,900) 1                     (4,900.00)
1                        1,260 0.9259                       1,166.67
2                        2,460 0.8573                       2,109.05
3                        1,660 0.7938                       1,317.76
4                        1,660 0.7350                       1,220.15
5                        1,460 0.6806                           993.65
6                        1,260 0.6302                           794.01

NPV = PV of Inflows-PV of Outflows

= (1166.67+2109.05+1317.76+1220.15+993.65+794.01)-4900

= 7601.30-4900

= $2701.30

Decision: Since the NPV is positive, accept the project

You can use the equation 1/(1+i)^n to find PVF using calculator

Formula to calculate PV in excel is as follows "=PV(interest rate,Year,0,cashflow)"

Formula to calculate NPV in excel is as follows "=NPV(Rate,cashflows)+initial investment"
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Transcribed Image Text

Suppose your firm is considering investing in a project with thecash flows shown below, that the required rate of return onprojects of this risk class is 8 percent, and that the maximumallowable payback and discounted payback statistics for the projectare 3.5 and 4.5 years, respectively.Time:0123456Cash flow:–$4,900$1,260$2,460$1,660$1,660$1,460$1,260Use the NPV decision rule to evaluate this project.(Do not round intermediate calculationsand round your final answer to 2 decimalplaces.)NPV__________Should it be accepted or rejected?acceptedrejected

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