Question

A firm evaluates all of its projects by using the NPV decision rule. The cash flows for a project are as follows: Year 0: -26,000, Year 1:19,000, Year 2: 14,000, Year 3:8,000. At a required return of 15 percent, what is the NPV for this project? At a required return of 38 percent, what is the NPV for this project?

Answer 1

The NPV for the project at a required return of 15 percent is $6,499.65, while at a required return of 38 percent it is -$3,909.82.

Step-by-step explanation:

To calculate the NPV (Net Present Value) for the project, we need to discount each cash flow at the required return rate and sum them up. Using the formula NPV = CF₀/(1+r)⁰ + CF₁/(1+r)¹ + CF₂/(1+r)² + CF₃/(1+r)³, where CF represents the cash flow and r is the required return rate, we can calculate the NPV.

At a required return of 15 percent, the NPV for this project is:

NPV = -26,000/(1+0.15)⁰ + 19,000/(1+0.15)¹ + 14,000/(1+0.15)² + 8,000/(1+0.15)³ = $6,499.65

At a required return of 38 percent, the NPV for this project is:

NPV = -26,000/(1+0.38)⁰ + 19,000/(1+0.38)¹ + 14,000/(1+0.38)² + 8,000/(1+0.38)³ = -$3,909.82