Question

Joe and Rich are both considering investing in a project with the following cash flows. Joe is content earning a 9 percent return, but Rich desires a return of 16 percent. Who, if either, should accept this project?year cash flow 0 -$25,000 1 13,700 2 18,400 a. joe, but not rich b. rich but not joe c. neither joe nor rich d. both joe and rich e. joe and possibly rich who will be neutral on this decision as his net present value will equal zero those are my choices

Answer 1

Answer:

d. both joe and rich 

Explanation:

To determine who should accept the project, the net present value should be calculated.

The net present value is the present value of after tax cash flows from an investment less the amount invested.

The net present value can be calculated using a financial calculator

Cash flow in year 0 =  -$25,000

Cash flow in year 1 = 13,700

Cash flow in year 2 = 18,400

Rich 's discount rate = 16%

Richs NPV = $484.54

Joe's discount rate = 9%

Joes NPV = $3,055.72

The decision rule with NPV is to invest if NPV is greater than zero

Since NPV is greater than zero for both rich and joe, they should both accept it.

To find the NPV using a financial calacutor:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. After inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.

3. Press compute

I hope my answer helps you