Q
18. Last month, Smith Systems Inc. decided to accept the project whose cash flows are shown below. However, before actually starting the project, the Federal Reserve took actions that lowered interest rates and therefore Smith's WACC. By how much did the change in the WACC affect the project's forecasted NPV? Assume that the Fed action does not affect the cash flows, and note that a project's projected NPV can be negative, in which case it should be rejected.
Cash flows:
Year 0 -$1,000
Year 1 $500
Year 2 $500
Year 3 $500
New WACC: 8.00%
Year: 0
Cash flows: -$1,000
a. $57.18
b. $60.19
c. $63.36
d. $66.69
e. $70.03
18. Last month, Smith Systems Inc. decided to accept the project whose cash flows are shown below. However, before actually starting the project, the Federal Reserve took actions that lowered interest rates and therefore Smith's WACC. By how much did the change in the WACC affect the project's forecasted NPV? Assume that the Fed action does not affect the cash flows, and note that a project's projected NPV can be negative, in which case it should be rejected.
Cash flows:
Year 0 -$1,000
Year 1 $500
Year 2 $500
Year 3 $500
New WACC: 8.00%
Year: 0
Cash flows: -$1,000
a. $57.18
b. $60.19
c. $63.36
d. $66.69
e. $70.03
A
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