Dennis wants to determine if the discount rate really makes any difference in th
ID: 2670746 • Letter: D
Question
Dennis wants to determine if the discount rate really makes any difference in the net present value of a project. He feels that if a project is acceptable at one rate of return, it will be acceptable at all rates of return. To explain why his thinking is incorrect, you are creating an example to illustrate your point. The cash flows you are using are as follows: time zero is -$71,000, years 1 through 4 are $17,500 each, and years 5 and 6 are $22,500 each. What is net present value at a discount rate of 12 percent and 17 percent?Explanation / Answer
1
2
3
4 =2 x 3
year
Cash flows
Pvcaf-12%
value
0
-71000
1
-71000
1 - 4
17500
3.3073
57877.75
5-6
22500
1.0741
24167.25
Net value= 11045
1
2
3
4 =2 x 3
year
Cash flows
Pvcaf-17%
value
0
-71000
1
-71000
1 - 4
17500
2.7432
48006
5-6
22500
0.846
19035
Net value= -3959
1
2
3
4 =2 x 3
year
Cash flows
Pvcaf-12%
value
0
-71000
1
-71000
1 - 4
17500
3.3073
57877.75
5-6
22500
1.0741
24167.25