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 12 percent,and that the maximum allowable payback and discounted payback statistic for the project are two and two and a half years,respectively.
Use the NPV decision rule to evaluate this project; should it be accepted or rejected?

A)$9,704.31, reject
B)$84,140.71, accept
C)$134,704.31, accept
D)$150,868.83, accept

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 12 percent,and that the maximum allowable payback and discounted payback statistic for the project are two and two and a half years,respectively.
Use the NPV decision rule to evaluate this project; should it be accepted or rejected?

A)$9,704.31, reject 
B)$84,140.71, accept 
C)$134,704.31, accept 
D)$150,868.83, accept

Quizplus · Accepted Answer

To calculate the NPV, we discount the cash flows back to the present using the required rate of return of 12 percent.

Cash Flows:
Year 0: -$100,000
Year 1: $40,000
Year 2: $50,000
Year 3: $60,000
Year 4: $70,000

The present value of these cash flows is:

PV = -$100,000 + $35,714.29 + $39,285.71 + $41,990.83 + $44,548.54
PV = $61,539.36

Since the NPV is positive, this project should be accepted as it is expected to generate a return greater than the required rate of return of 12%.

Note that we do not need to consider payback periods when using the NPV decision rule.

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