Question

Find the NPV and Pl for the project below. Should the project be accepted? Why or why not? • Initial investment = $1000 • End of first year cash flow = $400 • End of second year cash flow = $400 • End of third year cash flow = $400 • WACC = 5%

Answer 1

Given below is the calculation of NPV and Pl for the project and whether the project should be accepted or not:Calculation of NPV:YearCash FlowPV Factor (5%)Discounted Cash Flow0(1000)(1.00)$ (1000.00)1$ 400.00 0.9524$ 380.952$ 400.00 0.907$ 362.8123$ 400.00 0.8638$ 345.52NPV = $ 89.282Calculation of PI:PI = PV of inflows / Initial Investment= $1,088.28 / $1,000= 1.08828Since the PI is greater than 1, the project should be accepted.Should the project be accepted?Yes, the project should be accepted as the NPV of the project is positive. A positive NPV implies that the project will yield a return greater than the discount rate of 5%, which means that the company will earn a profit on the project. Also, the project's PI is greater than 1, which indicates that the project's cash inflows are more than the investment made.