Question
Last month, Sterling Systems analyzed a project with the following cash flows (in $ millions): CF 0 = $135; CF 1 = $39; CF 2
Last month, Sterling Systems analyzed a project with the following cash flows (in $ millions): CF0= $135; CF1= $39; CF2= $47; CF3= $65; and CF4 = $78. However, before the decision to accept or reject the project took place, the Federal Reserve changed interest rates and therefore the firms weighted average cost of capital rose from 7% to 11%. The Fed's action did not affect the forecasted cash flows. By how much did the change in the overall cost of capital affect the project's forecasted net present value (NPV)? Please round your answer to one decimal place (e.g., -4.5). Note that the NPV of a project equals the sum of the present value of each year's expected cash flow minus the cost of the initial investment. Your result should indicate a reduction in NPV so be certain to include a negative sign in front of your answer.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started