Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 8 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively. Use the NPV decision to evaluate this project; should it be accepted or rejected?
A) NPV = $1,766.55; accept the project
B) NPV = $892.19; accept the project
C) NPV = $1,288.94; accept the project
D) NPV = -$104.73; reject the project

Question

Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 8 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively. Use the NPV decision to evaluate this project; should it be accepted or rejected? 
A) NPV = $1,766.55; accept the project 
B) NPV = $892.19; accept the project 
C) NPV = $1,288.94; accept the project 
D) NPV = -$104.73; reject the project

Quizplus · Accepted Answer

To calculate NPV, we use the formula:

NPV = - Initial Investment + (CF1 / (1 + r)^1) + (CF2 / (1 + r)^2) + ... + (CFn / (1 + r)^n)

where:
- CFi is the net cash flow in period i
- r is the required rate of return
- n is the number of periods

Plugging in the numbers given, we get:

NPV = -$1,300 + ($250 / 1.08) + ($400 / 1.08^2) + ($600 / 1.08^3) + ($800 / 1.08^4) + ($1,000 / 1.08^5)

NPV = $1,766.55

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

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