A firm evaluates all of its projects by using the NPV decision rule. At a required return of 11 percent, the NPV for the following project is $_____ and the firm should _____ the project. At a required return of 30 percent, the NPV is $_____ and the firm should _____the project. Solution If required return = 11% NPV = -28000 + 18000/1.11 + 14000/(1.11)^2 + 9000/(1.11)^3 = 6159.6 As NPV is >0 , firm should accept this project At required return = 30% NPV = -28000 + 18000/1.3 + 14000/(1.3)^2 + 9000/(1.3)^3 = -1773 As NPV is <0, firm should reject the project .

1. A firm evaluates all of its projects by using the NPV decision rule. At a required return of 11
percent, the NPV for the following project is $_____ and the firm should _____ the project. At a
required return of 30 percent, the NPV is $_____ and the firm should _____the project.
Year Cash Flow
0 $28,000
1 18,000
2 14,000
3 9,000
Solution
If required return = 11%
NPV = -28000 + 18000/1.11 + 14000/(1.11)^2 + 9000/(1.11)^3
= 6159.6
As NPV is >0 , firm should accept this project
At required return = 30%
NPV = -28000 + 18000/1.3 + 14000/(1.3)^2 + 9000/(1.3)^3
= -1773
As NPV is <0, firm should reject the project