Consider a project with the following cash flows: CF0=$100 million, CF1=$-60 million, CF2=$-60 million. Should you accept or reject the project if the discount rate is 12%?

Question

Business

Jordyn Harris

20 May, 01:37

Consider a project with the following cash flows: CF0=$100 million, CF1=$-60 million, CF2=$-60 million. Should you accept or reject the project if the discount rate is 12%?

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Answers (1)

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Isabel Krause · Answer 1

Rejected

Explanation:

Given that

CF0 = $100 million

CF1 = $-60 million

CF2 = $-60 million

Discount rate of return = 12%

So, the computation of the net present value is shown below:

Net present value = Initial investment - annual cash flows

where,

Annual present value

= Yearly cash flows * PVIFA factor for 12% at 2 years

= - $60 million * 1.6901

= - $101.406 million

And, the initial investment = $100 million

So, the net present value is

= $100 million - $101.406 million

= - $1.406 million

Therefore, The project should be rejected