## Question

###### Suppose your firm is considering investing in a project with the cash flows shown below, that...

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 7 percent, and that the maximum allowable payback and discounted payback statistics for the project are 2.0 and 3.0 years, respectively.

Time: | 0 | 1 | 2 | 3 | 4 | 5 | 6 |

Cash flow: | –$7,400 | $1,170 | $2,370 | $1,570 | $1,570 | $1,370 | $1,170 |

NPV=____? (**round your final answer to 2 decimal places.****)**

## Answers

Year (n) Cash flow from project (CF) Cumulative cash flow PV = CF/(1+7%)^n Cumulative Discounted cash flow Formula used for PV calculation 0 -$7,400 -$7,400 -$7,400.00 -$7,400.00 CF/(1+7%)^0 1 $1,170 -$6,230 $1,093.46 -$6,306.54 CF/(1+7%)^1 2 $2,370 -$3,860 $2,070.05 -$4,236.49 CF/(1+7%)^2 3 $1,570 -$2,290 $1,281.59 -$2,954.90 CF/(1+7%)^3 4 $1,570 -$720 $1,197.75 -$1,757.16 CF/(1+7%)^4 5 $1,370 $650 $976.79 -$780.37 CF/(1+7%)^5 6 $1,170 $1,820 $779.62 -$0.75 CF/(1+7%)^6 NPV (Sum of PVs) -$0.75 Payback Period for project = 4.53 (In Years) Payback Period (period where cumulative cash flow is zero) = X + (Y/Z) Where, X = Last period with a negative cumulative cash flow; Y = Absolute value of cumulative cash flow at the end of the period X; Z = cash flow during the period after X. Discounted payback period is more than 6 years as cumulative discounted cash flow is negative at the end of year 6

Net present value (NPV) of the project is - $0.75

The project is not acceptable because payback and discounted payback statistics for the project are more than 2.0 and 3.0 years and NPV is negative

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