Question

A firm evaluates all of its projects by applying the NPV decision rule. A project under consideration has the following cash flows: Year Cash Flow 0 −$ 28,600 1 12,600 2 15,600 3 11,600 What is the NPV for the project if the required return is 11 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

At a required return of 11 percent, should the firm accept this project?
multiple choice 1
a.Yes
b.No

Answer 1

To determine if the project should be accepted, the NPV is calculated by discounting the future cash flows at an 11% required return. The NPV is found to be positive at $4,107.05, indicating that the firm should accept the project.

Step-by-step explanation:

To calculate the Net Present Value (NPV) of the project, we need to discount each of the future cash flows back to the present value using the required return of 11%. The formula for the present value of a future cash flow is:

Present Value = Future Cash Flow / (1 + r)^n

Where r is the required return and n is the number of periods until the cash flow is received.

1. Calculate the present value for Year 1 cash flow: PV1 = 12600 / (1 + 0.11)^1 = $11,351.35
2. Calculate the present value for Year 2 cash flow: PV2 = 15600 / (1 + 0.11)^2 = $12,703.60
3. Calculate the present value for Year 3 cash flow: PV3 = 11600 / (1 + 0.11)^3 = $8,652.10

Next, we combine these with the initial investment to get the NPV:

NPV = -28,600 + PV1 + PV2 + PV3

NPV = -28,600 + 11,351.35 + 12,703.60 + 8,652.10

NPV = $4,107.05

Since the NPV is positive, at an 11 percent required return, the firm should accept the project as it expects to add value to the firm.