A firm evaluates all of its projects by using the NPV decisi

A firm evaluates all of its projects by using the NPV decision rule. Year Cash Flow 0 –$29,000 1 24,000 2 14,000 3 4,000 Required: (a) At a required return of 25 percent, what is the NPV for this project? (b) At a required return of 34 percent, what is the NPV for this project?

Solution

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

a.

Present value of inflows=24000/1.25+14000/1.25^2+4000/1.25^3

=$30208

NPV=Present value of inflows-Present value of outflows

=$30208-$29000

=$1208.

b.

Present value of inflows=24000/1.34+14000/1.34^2+4000/1.34^3

=$27369.723

NPV=Present value of inflows-Present value of outflows

=$27369.723-$29000

=$(1630.277)(Negative).