Suppose your firm is considering investing in a project with

Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of returm on projects of this risk class is 7 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively. Time: Cash flow -$5,100 $1,240 $2,440 $1,640 $1,640 $1,440 $1,240 Use the NPV decision rule to evaluate this project.(Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your final answer to 2 decimal places.) NPV Should it be accepted or rejected? Rejected Accepted

Solution

NPV = Sum of Present Value of Cash Inflows - Sum of Present Value of Cash Outflows

= $1,240/1.07¹ + $2,440/1.07² + $1,640/1.07³ + $1,640//1.07⁴ + $1,440/1.07⁵ + $1,240/1.07⁶ - $5,100

= $1,157.88 + $2,131.19 + $1,338.73 + $1,251.15 + $1,026.70 + $826.26 - $5,100

= $2,632.91

According to the NPV decision rule,

As the NPV is positive, the project will be accepted.