You are analyzing a project and have prepared the following data:
$\begin{array} { | l | l | }
\hline \text { Year } & \text { Cash Flow } \
\hline 0 & - £ 169,000 \
\hline 1 & £ 46,200 \
\hline 2 & £ 87,300 \
\hline 3 & £ 41,000 \
\hline 4 & £ 39,000 \
\hline
\end{array}$
Required payback period: 2.5 years Required AAR: 7.25% Required return: 8.50%
Based on the net present value of _____for this project, you should _____ the project.
A)-£2,021.28; reject
B)-£406.19; reject
C)£7,978.72; accept
D)£9,836.74; accept
E)£12,684.23; accept

Question

You are analyzing a project and have prepared the following data: 
$\begin{array} { | l | l | } 
\hline \text { Year } & \text { Cash Flow } \
\hline 0 & - £ 169,000 \
\hline 1 & £ 46,200 \
\hline 2 & £ 87,300 \
\hline 3 & £ 41,000 \
\hline 4 & £ 39,000 \
\hline
\end{array}$
Required payback period: 2.5 years Required AAR: 7.25% Required return: 8.50%
Based on the net present value of _____for this project, you should _____ the project.
A)-£2,021.28; reject
B)-£406.19; reject
C)£7,978.72; accept
D)£9,836.74; accept
E)£12,684.23; accept

Quizplus · Accepted Answer

To calculate the net present value (NPV), we need to discount each cash flow to its present value using the required return of 8.50%. 
PV of year 0 cash flow = -£169,000 
PV of year 1 cash flow = £42,780.79 
PV of year 2 cash flow = £73,631.15 
PV of year 3 cash flow = £30,090.93 
PV of year 4 cash flow = £25,035.26 
NPV = -£169,000 + £42,780.79 + £73,631.15 + £30,090.93 + £25,035.26 = £2,537.13
Since the NPV is positive, we should accept the project. Only option C has a positive NPV.

You Are Analyzing a Project and Have Prepared the Following