Question

Consider this project with an internal rate of return of 13.1%. The following are the cash flows of the project. Year Cash Flow 0 + $ 100 1 − 60 2 − 60 a. What is project NPV if the discount rate is 12%? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.) b. Should you accept the project? Yes No

Answer 1

The NPV of the project at a 12% discount rate is calculated to be -$1.38. Since the NPV is negative, this typically suggests the project should not be accepted. However, given the closeness to zero, a further review might be considered.

Step-by-step explanation:

To calculate the net present value (NPV) of the project with a discount rate of 12%, we must discount each cash flow back to its present value and sum them up. Applying the formula Present Value = Future Cash Flow / (1 + r)^n, where r is the discount rate and n is the number of periods, we get:

Present Value of Cash Flow at Year 0: +$100 (already in present value)

Present Value of Cash Flow at Year 1: -$60 / (1 + 0.12)^1 = -$53.57

Present Value of Cash Flow at Year 2: -$60 / (1 + 0.12)^2 = -$47.81

Adding these up, the NPV = $100 - $53.57 - $47.81 = -$1.38.

Should you accept the project? Generally, a project should be accepted if its NPV is positive and rejected if it is negative. Since the NPV at a 12% discount rate is slightly negative (-$1.38), one might lean towards rejecting the project. However, given the NPV is very close to zero and the internal rate of return (IRR) is above the discount rate, further analysis could be warranted to make a firm decision.