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

Problem 9-8 Calculating NPV [LO1]
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    –$    27,200   
1         11,200   
2         14,200   
3         10,200   
________________________________________
 
What is the NPV for the project if the required return is 11 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
 
At a required return of 11 percent, should the firm accept this project?

•   
No
•   
Yes

What is the NPV for the project if the required return is 25 percent? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
  

At a required return of 25 percent, should the firm accept this project?

•   
Yes
•   
No
Explanation
Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation.

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 an 11 percent required return is:

NPV = –$27,200 + $11,200/1.11 + $14,200/1.112 + $10,200/1.113 = $1,873.28

At an 11 percent required return, the NPV is positive, so we would accept the project.

The equation for the NPV of the project at a required return of 25 percent is:

NPV = –$27,200 + $11,200/1.25 + $14,200/1.252 + $10,200/1.253 = –$3,929.60

At a required return of 25 percent, the NPV is negative, so we would reject the project.
 
Calculator Solution:

CFo	–$27,200	CFo	–$27,200
C01	$11,200	C01	$11,200
F01	1	F01	1
C02	$14,200	C02	$14,200
F02	1	F02	1
C03	$10,200	C03	$10,200
F03	1	F03	1
I = 11%		I = 25%
NPV CPT		NPV CPT
$1,873.28		–$3,929.60