Last month,Smith Systems Inc.decided to accept the project whose cash flows are shown below.However,before actually starting the project,the Bank of Canada took actions that lowered interest rates and therefore Smith's WACC.By how much did the change in the WACC affect the project's forecasted NPV? Assume that the Bank of Canada's action does not affect the cash flows. $\begin{array}{lcccc}
\text { New WACC: } & 8.00 \% & \text { Old WACC: } & 11.00 \% & \
\text { Year: } & 0 & 1 & 2 & 3 \
\text { Cash flows: } & -\$ 1,000 & \$ 500 & \$ 500 & \$ 500
\end{array}$
A)$57.18
B)$60.19
C)$63.36
D)$66.69

Question

Last month,Smith Systems Inc.decided to accept the project whose cash flows are shown below.However,before actually starting the project,the Bank of Canada took actions that lowered interest rates and therefore Smith's WACC.By how much did the change in the WACC affect the project's forecasted NPV? Assume that the Bank of Canada's action does not affect the cash flows.​​ $\begin{array}{lcccc}
\text { New WACC: } & 8.00 \% & \text { Old WACC: } & 11.00 \% & \
\text { Year: } & 0 & 1 & 2 & 3 \
\text { Cash flows: } & -\$ 1,000 & \$ 500 & \$ 500 & \$ 500
\end{array}$ ​
A)$57.18
B)$60.19
C)$63.36
D)$66.69

Quizplus · Accepted Answer

The change in the project's forecasted NPV due to the change in WACC can be calculated by finding the NPV at both the old and new WACC rates and then finding the difference between these two NPVs.- Using the old WACC (11%):  NPV = -\$1,000 + \(\$500 / (1 + 0.11)^1) + \(\$500 / (1 + 0.11)^2) + \(\$500 / (1 + 0.11)^3)       = -\$1,000 + \$450.45 + \$405.90 + \$365.68       = \$221.03- Using the new WACC (8%):  NPV = -\$1,000 + \(\$500 / (1 + 0.08)^1) + \(\$500 / (1 + 0.08)^2) + \(\$500 / (1 + 0.08)^3)       = -\$1,000 + \$462.96 + \$428.89 + \$397.12       = \$288.97- Change in NPV due to the change in WACC = NPV at new WACC - NPV at old WACC   = \$288.97 - \$221.03   = \$67.94However, since \$67.94 is not an option and considering the possibility of a calculation mistake in the final step, let's correct the calculation error:Correct calculation for the change in NPV:- Using the old WACC (11%):  NPV_old = -\$1,000 + \(\$500 / (1 + 0.11)^1) + \(\$500 / (1 + 0.11)^2) + \(\$500 / (1 + 0.11)^3)       = -\$1,000 + \$450.45 + \$405.41 + \$365.20       = \$220.06- Using the new WACC (8%):  NPV_new = -\$1,000 + \(\$500 / (1 + 0.08)^1) + \(\$500 / (1 + 0.08)^2) + \(\$500 / (1 + 0.08)^3)       = -\$1,000 + \$462.96 + \$428.89 + \$397.12       = \$288.97- Change in NPV = NPV_new - NPV_old   = \$288.97 - \$220.06   = \$68.91Given the options and the recalculated explanation, it seems there was a mistake in the final step of the calculation. The correct approach to find the difference in NPV due to the change in WACC involves calculating the NPVs at both WACC rates and subtracting them. However, the provided options and the calculation steps do not align perfectly with the recalculated outcome, indicating a mistake in the initial explanation. The correct answer should reflect the difference in NPV due to the change in WACC, but without a precise match in the options, the explanation aimed to demonstrate the process of calculation.

Last Month,Smith Systems Inc ​ A)$57

Last Month,Smith Systems Inc
A)$57