A firm evaluates all of its projects by applying the NPV decision rule. A project under consideration has the following cash flows:

A firm evaluates all of its projects by applying the NPV decision rule. A project under consideration has the following cash flows:

Year	Cash Flow
0	–$	27,400
1		11,400
2		14,400
3		10,400

What is the NPV for the project if the required return is 12 percent? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

NPV

$

At a required return of 12 percent, should the firm accept this project?

Yes

What is the NPV for the project if the required return is 24 percent? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

NPV

$

At a required return of 24 percent, should the firm accept this project?

No

Explanation:

The NPV of a project is the PV of the inflows minus the PV of the outflows. The equation for the NPV of this project at a 12 percent required return is:

NPV = –$27,400 + $11,400 / 1.12 + $14,400 / 1.122 + $10,400 / 1.123 = $1,660.68

At a 12 percent required return, the NPV is positive, so we would accept the project.

The equation for the NPV of the project at a 24 percent required return is:

NPV = –$27,400 + $11,400 / 1.24 + $14,400 / 1.242 + $10,400 / 1.243 = –$3,386.54

At a 24 percent required return, the NPV is negative, so we would reject the project.

  

Calculator Solution:

Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation.

    

	CFo	–$27,400	CFo	–$27,400
	C01	$11,400	C01	$11,400
	F01	1	F01	1
	C02	$14,400	C02	$14,400
	F02	1	F02	1
	C03	$10,400	C03	$10,400
	F03	1	F03	1
	I = 12%		I = 24%
	NPV CPT		NPV CPT
	$1,660.68		–$3,386.54