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Business

Finance

NPV

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 21P

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Question

Initial cost:

$220,000

Cash flow year one:

$25,000

Cash flow year two:

$77,000

Cash flow year three:

$157,000

Cash flow year four:

$157,000

a. Using a discount rate of

11%

for this project and the NPV model, determine whether the company should accept or reject this project.

b. Should the company accept or reject it using a discount rate of

14%?

c. Should the company accept or reject it using a discount rate of

18%?

Definition Definition Calculation used to evaluate the investment and financing decisions that involve cash flows occurring over multiple periods. NPV is calculated as the difference between the present value of cash inflow and cash outflow. NPV is used for capital budgeting and investment planning as well as to compare similar investment alternatives.

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