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 8 percent,and that the maximum allowable payback and discounted payback statistic for the project are three and three and a half years,respectively. Use the NPV decision rule to evaluate this project; should it be accepted or rejected?
A) $35,995.86, reject
B) $38,875.53, accept
C) $138,875.53, accept
D) $238,875.53, 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 8 percent,and that the maximum allowable payback and discounted payback statistic for the project are three and three and a half years,respectively.  Use the NPV decision rule to evaluate this project; should it be accepted or rejected?
A) $35,995.86, reject 
B) $38,875.53, accept 
C) $138,875.53, accept 
D) $238,875.53, accept

Quizplus · Accepted Answer

To evaluate the project using the NPV decision rule, we need to calculate the present value of the project's cash flows using the required rate of return of 8%. The cash flows are already given, so we can calculate the NPV as follows:

NPV = -$500,000 + ($150,000 / 1.08) + ($200,000 / 1.08^2) + ($300,000 / 1.08^3) + ($400,000 / 1.08^4)

NPV = $38,875.53

Since the NPV is positive, the project should be accepted. Therefore, the best choice is B.

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