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fox File Edit View History Bookmarks Tools Window Help Chapter 9 Quiz ezto.mheducation.com/hm.tpx 2.b0 points Problem 9-8 Calculating NPV [LO1] 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 $28,500 12,500 15,500 11,500 2 3 What is NPV for the project if the required return is 10 percent? (D° not round intermediate calculations and round your answer to 2 decimal places, e.g. 32.16) NPV At a required return of 10 percent, should the firm accept this project? O No O Yes What is the NPV for the project if the required return is 26 percent? (Negative amount should be ndicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g. 32.16.) At a required return of 26 percent, should the firm accept this project? Yes No References

Solution

Solution: 1. NPV 4,313.67 Working Notes: NPV at 10% required rate of return. a b c= a x b Year Cash Flows PVF @ 10% Present value 0 ($28,500) 1 -28,500.00 1 12,500 0.909090909 11,363.64 2 15,500 0.826446281 12,809.92 3 11,500 0.751314801 8,640.12 NPV 4,313.67 Notes: PVF is calculated @ 10% = 1/(1+0.10)^n     where n is the year of cash flows for which PVF is calculated. NPV is some of Present value of all the cash flow of the projects 2. YES Working Notes: As per our calculation in 1, NPV is positive 4,313.67 at 10% required rate of return, hence the firm should accept the project. Positive NPV means , the project is able to recovered it cost of capital with investment. 3. NPV -3,067.28 Working Notes: NPV at 26% required rate of return. a b c= a x b Year Cash Flows PVF @ 26% Present value 0 ($28,500) 1 -28500.00 1 12,500 0.793650794 9920.63 2 15,500 0.629881582 9763.16 3 11,500 0.499906018 5748.92 NPV -3067.28 Notes: PVF is calculated @ 26% = 1/(1+0.26)^n     where n is the year of cash flows for which PVF is calculated. NPV is some of Present value of all the cash flow of the projects 4. NO Working Notes: As per our calculation in 3, NPV is negative 3,067.28 at 26% required rate of return, hence the firm should not accept the project as it is not able to recovered it cost of capital. Please feel free to ask if anything about above solution in comment section of the question.