Npv 53 cf1 1k1 cf2 1k2 cfn ico 1kn certified

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: ct’s initial cash outflow. NPV = 53 CF1 (1+k)1 + CF2 (1+k)2 +...+ CFn - ICO (1+k)n Certified Financial Controller CFC NPV Solution Basket Wonders has determined that the Wonders has determined that the appropriate discount rate (k) for this project is 13%. NPV = $10,000 +$12,000 +$15,000 + (1.13)2 (1.13)3 (1.13)1 $10,000 $7,000 + 40, (1.13)4 (1.13)5 - $40,000 54 Certified Financial Controller CFC 27 NPV Solution NPV = $10,000(PVIF13%,1) + $12,000(PVIF13%,2) + $15,000(PVIF13%,3) + $10,000(PVIF13%,4) + $ 7,000(PVIF13%,5) – $40,000 40, NPV = $10,000(0.885) + $12,000(0.783) + $15,000(0.693) + $10,000(0.613) + $ 7,000(0.543) – $40,000 40, NPV = $8,850 + $9,396 + $10,395 + $6,130 + $3,801 – $40,000 40, = - $1,428 55 Certified Financial Controller CFC NPV Acceptance Criterion The management of Basket Wonders has determined that the required rate is 13% for projects of this type. Should this project be accepted? No! The NPV is negative. This means Th NPV Thi that the project is reducing shareholder wealth. [Reject as NPV < 0 ] NPV 56 Certified Financial Controller CFC 28 NPV Strengths and Weaknesses Strengths: Weaknesses: • Cash flows • assumed to be reinvested at...
View Full Document

Ask a homework question - tutors are online