Last Month, Standard Systems Analyzed the Project Whose Cash Flows

question 30

Multiple Choice

Last month, Standard Systems analyzed the project whose cash flows are shown below.However, before the decision to accept or reject the project took place, the Federal Reserve changed interest rates and therefore the firm's cost of capital (r) .The Fed's action did not affect the forecasted cash flows.By how much did the change in the r affect the project's forecasted NPV? Note that a project's expected NPV can be negative, in which case it should be rejected. $$\begin{array} { l c c c c } \text { Old r: } & 10.00 \% & \text { New r: } & 11.25 \% \\\text { Year } & 0 & 1 & 2 & 3 \\\hline \text { Cash flows } & - \$ 1,000 & \$ 410 & \$ 410 & \$ 410\end{array}$$

• A) ?$18.89
• B) ?$19.88
• C) ?$20.93
• D) ?$22.03
• E) ?$23.13

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Definitions:

Shipment Contract

An agreement in which the seller is obligated to send goods to a buyer, but the risk of loss passes to the buyer when the goods are delivered to the carrier.

Title Passes

The point at which ownership of property is transferred from one party to another according to the terms of a contract.

Goods Arrive

The event or process where purchased or ordered products reach their destination or the buyer's location.

Fungible Goods

Goods of which any unit is identical from another and can be substituted, such as grains, fuels, or money.