Last month Lloyds Systems analyzed the project whose cash fl

Last month, Lloyd\'s Systems analyzed the project whose cash flows are shown below. However, before the decision to accept or reject the project, the Federal Reserve took actions that changed interest rates and therefore the firm\'s WACC. The Fed\'s action did not affect the forecasted cash flows. By how much did the change in the WACC affect the project\'s forecasted NPV? Note that a project\'s projected NPV can be negative, in which case it should be rejected.

Question 40 options:

-$43.26

-$39.80

-$48.02

-$47.15

-$44.12

Solution

Old WACC

NPV = -1000 + 410/1.1 + 410/1.1^2 + 410/1.1^3

NPV = $ 19.61

New WACC

NPV = -1000 + 410/1.125 + 410/1.125^2 + 410/1.125^3

NPV = - $ 23.65

Due to Change in WACC , Amount of NPV Change = -23.65 - 19.61

Due to Change in WACC , Amount of NPV Change = - $ 43.26

Answer

A) $ 43.26

Note :

In New WACC , the project should be rejected