Directions: Calculate the answer to each question, then enter the correct answer. Check your solution with the Answer Key on the next page.

4. A project has an initial investment of $10,000 and a cash flow annuity of $5,000 for three years. If the required rate of return is 10%, what is the NPV of the project?
$_____________________

Should the project be accepted based on the NPV method of capital budgeting?
_____ a) Yes
_____ b) No

5. A project has an initial investment of $20,000 and a cash flow annuity of $5,000 for four years. If the required rate of return is 12%, what is the NPV of the project?
$_____________________

Should the project be accepted based on the NPV method of capital budgeting?
_____ a) Yes
_____ b) No

ANSWER KEY

4. A project has an initial investment of $10,000 and a cash flow annuity of $5,000 for three years. If the required rate of return is 10%, what is the NPV of the project?
$2,434.26

Enter -$10,000 as CF 0 and three cash flows of $5,000
Enter 10% as the discount rate
Press the NPV key and you should get $2,434.26
Should the project be accepted based on the NPV method of capital budgeting?
Yes ­ The project should be accepted because its NPV is positive.

5. A project has an initial investment of $20,000 and a cash flow annuity of $5,000 for four years. If the required rate of return is 12%, what is the NPV of the project?
­$4,813.25
Enter -$20,000 as CF0 and four cash flows of $5,000
Enter 12% as the discount rate
Press the NPV key and you should get -$4,813.25
Should the project be accepted based on the NPV method of capital budgeting?
No ­ The project should be rejected because its NPV is negative.