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 evaluate the project using the NPV decision rule, we need to find the present value of all cash flows and subtract the initial investment. The cash flows are given as follows:

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

Using a discount rate of 12%, we can calculate the present value of each cash flow and add them up to get the net present value (NPV).

NPV = -100,000 + 40,000/1.12 + 50,000/1.12^2 + 60,000/1.12^3 + 70,000/1.12^4
NPV = $150,868.83

Since the NPV is positive, the project should be accepted.

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