For the given cash flows, suppose the firm uses the NPV decision rule. Year Cash Flow 0 –$ 146,000 1 70,000 2 69,000 3 53,000 At a required...

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Finance

For the given cash flows, suppose the firm uses the NPV decisionrule.

Year Cash Flow
0 –$ 146,000
1 70,000
2 69,000
3 53,000

At a required return of 11 percent, what is the NPV of the project?(Do not round intermediate calculations and round youranswer to 2 decimal places, e.g.,32.16.)

NPV           $

At a required return of 22 percent, what is the NPV of the project?(A negative answer should be indicated by a minus sign. Donot round intermediate calculations and round your answer to 2decimal places, e.g., 32.16.)

NPV           $

Answer & Explanation Solved by verified expert

4.3 Ratings (928 Votes)

Part 1: At required return of 11%

NPV=-Initial cash outflow + Present value of future cash flows
Present value of future cash flows=Cash flow in year 1/(1+Required return)^1+Cash flow in year 2/(1+Required return)^2+Cash flow in year 3/(1+Required return)^3
Using the cash flows given in the question, we get:
Present value of future cash flows=70000/(1+11%)^1+69000/(1+11%)^2+53000/(1+11%)^3
=70000/(1.11)^1+69000/(1.11)^2+53000/(1.11)^3
=70000/1.11+69000/1.2321+53000/1.367631
=63063.06306+56001.94789+38753.14321
=157818.1542
Present value of future cash flows=$157818.1542
Initial cash outflow=$146000
NPV=-$146000+$157818.1542=$11818.1542 or $11818.15 (Rounded to two decimal places)

Part 2: At required return of 22%

Present value of future cash flows=70000/(1+22%)^1+69000/(1+22%)^2+53000/(1+22%)^3
=70000/(1.22)^1+69000/(1.22)^2+53000/(1.22)^3
=70000/1.22+69000/1.4884+53000/1.815848
=57377.04918+46358.50578+29187.46503
=132923.02
Present value of future cash flows=$132923.02
Initial cash outflow=$146000
NPV=-$146000+$132923.02=-$13076.98

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Transcribed Image Text

For the given cash flows, suppose the firm uses the NPV decisionrule. YearCash Flow0–$146,000170,000269,000353,000At a required return of 11 percent, what is the NPV of the project?(Do not round intermediate calculations and round youranswer to 2 decimal places, e.g.,32.16.) NPV $At a required return of 22 percent, what is the NPV of the project?(A negative answer should be indicated by a minus sign. Donot round intermediate calculations and round your answer to 2decimal places, e.g., 32.16.) NPV $