Question

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%?

Answer 1

Answer:

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