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A project that costs $2,200 to install will provide annual cash flows of $570 for the next 5 years
A project that costs $2,200 to install will provide annual cash flows of $570 for the next 5 years. The firm accepts projects with payback periods of less than 4 years.
a) What is this project's payback period? in years (Round your answer to 3 decimal places.)
b) Will the project be accepted?
c-1) What is project NPV if the discount rate is 3%? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.)
c-2) Should this project be pursued?
d-1) What is project NPV if the discount rate is 10%? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.)
d-2) Should this project be pursued?
e) Will the firm's decision change as the discount rate changes?
Expert Solution
a) Payback period = 3.860 years
b) The project should be accepted because the payback period is less than the required payback period (4 years).
c-1) NPV at 3% discount rate = $410.43
c-2) The project should be pursued because the NPV is positive.
d-1) NPV at 10% discount rate = -$39.25
d-2) The project should not be accepted because the NPV is negative.
e) Yes, the firm's decision would change if discount rate changes. At 3% discount rate NPV is positive and the 10% discount rate the NPV is negative. As if the discount rate change from 3% to 10% the NPV would become negative and the project should not be accepted.
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