QUESTION 53

Consider a capital budgeting project with the following expected future cash flows:

Year cash flow

0 - 100,000

1 20,000

2 10,000

3 20,000

4 40,000

5 40,000

6 75,000

The appropriate weighted average cost of capital (WACC) for this project is 7% per year.

Based on this information, answer the following:

A. What is the project's net present value (NPV)?

B. What does this NPV tell you about the project's value as compared to its price?

C. What is the project's internal rate of return (IRR)?

D. What does this IRR tell you about the project's expected return as compared to its required return?

E. Should the project be accepted or rejected? Why?