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cfc session 7 ch8

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

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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...
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