Question

A project that provides annual cash flows of $18,200 for nine years costs $88,000 today.
What is the NPV for the project if the required return is 8 percent? (Round your answer to 2 decimal places. (e.g., 32.16))
a. At a required return of 8 percent, should the firm accept this project?
Accept
Reject
b. What is the NPV for the project if the required return is 20 percent? (Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places. (e.g., 32.16))
c. At a required return of 20 percent, should the firm accept this project?
Accept
Reject
d. At what discount rate would you be indifferent between accepting the project and rejecting it? (Round your answer to 2 decimal places. (e.g., 32.16))

Answer 1

Answer:

a) the project should be accepted because its NPV is positive ($25,693.36)

b) if the required rate of return is 20%, the NPV = -$14,636.41

c) the project should be rejected because its NPV is negative

Explanation:

initial outlay year 0 -$88,000

cash flows years 1 - 9= $18,200

required rate of return = 8%

NPV = $25,693.36

required rate of return = 20%

NPV = -$14,636.41

the project's IRR = 14.63%