Last month, Lloyd's Systems analyzed the project whose cash flows are shown below. However, before the decision to accept or reject the project, the Federal Res
Question
Old WACC: 10.00% New WACC: 9.50%
Year 0 1 2 3
Cash flows $1,000 $410 $410 $410
Answers: A.
$10.85
B.
$10.13
C.
$9.04
D.
$11.12
E.
$10.22
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1. User Answers sqdancefan
Answer:
C. $9.04
Stepbystep explanation:
The net present value of a cash flow C in year n at some interest rate r is given by ...
NPV = C·(1 +r)^(n)
Adding the values of the different cash flows at the different interest rates, we get the results shown in the attached table. The NPV goes up by $9.04 when the cost of capital goes down.
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Additional comment
Neither WACC will cause this project to be rejected. If the WACC were to increase to 11.11%, then the project would have a zero return.