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 statistics for your company are 2.5 and 3.0 years, respectively.

Time: 0 1 2 3 4 5
Cash flow: −$228,000 $65,100 $83,300 $140,300 $121,300 $80,500
Use the NPV decision rule to evaluate this project.
Note: Do not round intermediate calculations and round your final answer to 2 decimal places.

Answer 1

The NPV is positive ($114,626.99), the project is considered profitable and should be accepted

To evaluate the project using the NPV decision rule, we need to calculate the present value of each cash flow and sum them up.

The formula to calculate the present value is PV = CF / (1 + r)^t, where PV is the present value, CF is the cash flow, r is the required rate of return, and t is the time period.

Using this formula, we can calculate the present value of each cash flow:

CF0 = -$228,000 / (1 + 0.12)^0 = -$228,000

CF1 = $65,100 / (1 + 0.12)^1 = $58,259.82

CF2 = $83,300 / (1 + 0.12)^2 = $68,520.03

CF3 = $140,300 / (1 + 0.12)^3 = $98,040.18

CF4 = $121,300 / (1 + 0.12)^4 = $74,133.35

CF5 = $80,500 / (1 + 0.12)^5 = $43,673.61

Now, we can sum up the present values:

NPV = CF0 + CF1 + CF2 + CF3 + CF4 + CF5 = -$228,000 + $58,259.82 + $68,520.03 + $98,040.18 + $74,133.35 + $43,673.61 = $114,626.99

Since the NPV is positive ($114,626.99), the project is considered profitable and should be accepted