Question

company has an investment project that would cost $10 million today and yield a payoff of $15 million in 4 years. (Make sure to show all your work.)a.Calculate the present value if the interest rate is 11 percent.Should the firm undertake the project if the interest rate is 11 percent? Why?b.Calculate the present value if the interest rate is 10 percent.Should the firm undertake the project if the interest rate is 10 percent? Why?c.Calculate the present value if the interest rate is 9 percent.Should the firm undertake the project if the interest rate is 9 percent? Why?

Answer 1

Answer:

a. I = 11%

NPV =  -$119,035.39

The firm shouldn't undertake the project because the present value is negative.

b. I = 10%

NPV = $245,201.83

The firm should undertake the project because the present value Is positive.

c. I = 9%

NPV = $626,378.17

The firm should undertake the project because the present value Is positive.

Explanation:

Net present value is the present value of after tax cash flows from an investment less the amount invested.

The decision rule is to not to undertake a project if its present value is negative and undertake it if it is positive.

The present value can be calculated using a financial calculator.

Cash flow in year zero = -$10 million 

Cash flow each year from year 1 to 3 = 0

Cash flow in year 4 = $15 million

a. I = 11%

NPV =  -$119,035.39

b. I = 10%

NPV = $245,201.83

c. I = 9%

NPV = $626,378.17

To find the NPV using a financial calacutor:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. After inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.

3. Press compute

I hope my answer helps you