Project Black Swan requires an initial investment of $115,000. It has positive cash flows of $140,000 for each of the next two years. Because of major demolition and environmental clean-up costs, cash flow for the third and final year of the project is $(170,000). If the company 's required rate of return is 12%, the project should be
A) rejected because the IRR is less than 12%.
B) accepted because the NPV is positive at 12%.
C) the project is unacceptable at any discount rate.
D) rejected because there may be more than one IRR.

Question

Quizplus · Accepted Answer

To determine whether the project should be accepted or not, we need to calculate the net present value (NPV) of the project using the given cash flows and the company's required rate of return of 12%.

NPV = -Initial Investment + (CF1 / (1+r)^1) + (CF2 / (1+r)^2) + (CF3 / (1+r)^3)

NPV = -115,000 + (140,000 / (1+0.12)^1) + (140,000 / (1+0.12)^2) + (-170,000 / (1+0.12)^3)

NPV = $34,288.71

Since the NPV is positive at 12%, the project should be accepted. Therefore, the correct answer is B.

Project Black Swan Requires an Initial Investment of $115,000