The Flour Baker is considering a project with the following cash flows. TABLE

Question:

The Flour Baker is considering a project with the following cash flows.

Year Cash Flow
0 -$59 000
1 12 000
2 24 000
3 22 000
4 13 000

Should this project be accepted based on its internal rate of return if the required return is 11%?

Net Present Value:

The tools the finance managers use to choose among various options of investments or projects depend upon the risk, amount of capital allocation, and the required rate of return expected. The tools used are net present value, internal rate of return, payback period, and accounting rate of return.

Answer and Explanation:

The net present value method will be used to decide on project acceptance or rejection

  • The investment amount is $59,000
  • The cash inflows will be received for 4 years and are given
  • The required rate of return is 11%

The net present value is calculated below

year Annual net cash inflows present value factor at 11% present value of cash flows Present value of cumulative cash flows
0 -$59,000 1 -$59,000 ($59,000)
1 $12,000 0.900900901 $10,811 ($48,189)
2 $24,000 0.811622433 $19,479 ($28,710)
3 $22,000 0.731191381 $16,086 ($12,624)
4 $13,000 0.658730974 $8,564 ($4,061)

The net present value is negative cash flow of $4,061, and the project should be rejected


Learn more about this topic:

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How to Calculate Net Present Value: Definition, Formula & Analysis

from Financial Accounting: Help and Review

Chapter 5 / Lesson 20
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