Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 8 percent, and that the maximum allowable payback and discounted payback statistics for the project are three and a half and four and a half years, respectively. Use the NPV decision to evaluate this project; should it be accepted or rejected?
$$\begin{array} { l c c c c c c c c c }
\text { Time } & 0 & 1 & 2 & 3 & 4 & 5 & 6 \
\text { Cash Flow } & - \$ 5,000 & \$ 1,200 & \$ 1,400 & \$ 1,600 & \$ 1,600 & \$ 1,100 & \$ 2,000
\end{array}$$
A) NPV = $1,766.55, accept the project
B) NPV = $892.19, accept the project
C) NPV = $1,288.94, accept the project
D) NPV = ?$104.73, reject the project

Question

Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 8 percent, and that the maximum allowable payback and discounted payback statistics for the project are three and a half and four and a half years, respectively. Use the NPV decision to evaluate this project; should it be accepted or rejected?
$$\begin{array} { l c c c c c c c c c } 
\text { Time } & 0 & 1 & 2 & 3 & 4 & 5 & 6 \
\text { Cash Flow } & - \$ 5,000 & \$ 1,200 & \$ 1,400 & \$ 1,600 & \$ 1,600 & \$  1,100 & \$ 2,000
\end{array}$$
A) NPV = $1,766.55, accept the project
B) NPV = $892.19, accept the project
C) NPV = $1,288.94, accept the project
D) NPV = ?$104.73, reject the project

Quizplus · Accepted Answer

The NPV (Net Present Value) of the project is calculated by discounting each cash flow at the project's required rate of return (8% in this case) and then summing those values. The formula for NPV is: $$NPV = \sum \frac{CF_t}{(1+r)^t}$$ where $CF_t$ is the cash flow at time $t$, and $r$ is the discount rate. Calculating the NPV for each cash flow given and summing them up gives a positive NPV of $1,766.55, indicating that the present value of future cash flows is greater than the initial investment, thus the project should be accepted.

Suppose Your Firm Is Considering Investing in a Project with the Cash