A project that provides annual cash flows of $16,600 for eight years costs $72,000 today.
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What is the NPV for the project if the required return is 7 percent? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.)
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NPV | $ |
At a required return of 7 percent, should the firm accept this project?
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Accept |
What is the NPV for the project if the required return is 19 percent? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
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NPV | $ |
At a required return of 19 percent, should the firm accept this project?
|
Reject |
At what discount rate would you be indifferent between accepting the project and rejecting it? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
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Discount rate | % |
The NPV of a project is the PV of the inflows minus the PV of the outflows. Since the cash inflows are an annuity, the equation for the NPV of this project at a 7 percent required return is:
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NPV = –$72,000 + $16,600(PVIFA7%, 8) = $27,123.56 |
At a 7 percent required return, the NPV is positive, so we would accept the project. |
The equation for the NPV of the project at a 19 percent required return is: |
NPV = –$72,000 + $16,600(PVIFA19%, 8) = –$6,357.53 |
At a 19 percent required return, the NPV is negative, so we would reject the project. |
We would be indifferent to the project if the required return was equal to the IRR of the project, since at that required return the NPV is zero. The IRR of the project is:
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0 = –$72,000 + $16,600(PVIFAIRR, 8) |
IRR = 16.04% |
Calculator Solution: |
Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation. |
CFo
| –$72,000 |
CFo
| –$72,000 |
CFo
| –$72,000 | |
C01
| $16,600 |
C01
| $16,600 |
C01
| $16,600 | |
F01
| 8 |
F01
| 8 |
F01
| 9 | |
I = 7% | I = 19% | IRR CPT | ||||
NPV CPT | NPV CPT | 16.04% | ||||
$27,123.56 | –$6,357.53 |
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