Last Month, Lloyd's Systems Analyzed the Project Whose Cash Flows $\begin{array} { l c c c c c } \text { Old WACC: } & 10.00 \% & { \text { New WACC: } 11.25 \% } \end{array}$

question 94

Short Answer

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. $\begin{array} { l c c c c c } \text { Old WACC: } & 10.00 \% & { \text { New WACC: } 11.25 \% } \end{array}$

$\begin{array}{c}\begin{array}{lll} \text {Year}\\\text {Cash flows}\end{array}\begin{array}{c} 0 \\\hline -\$1,100\end{array}\begin{array}{c}1 \\\hline \$410\end{array}\begin{array}{c}2 \\\hline \$410\end{array}\begin{array}{c}3 \\\hline \$410\end{array}\end{array}$

$\begin{array} { l c c c c c } \text { Old NPV } = \$ 19.61 & & & & \\\text { New NPV } = - \$ 2.42 & & & & \\\hline \text { Change } = - \$ 22.03 & & & &\end{array}$

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Definitions:

Salaries Payable

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Income Statement

A financial statement that reports a company's financial performance over a specific accounting period, detailing revenues, expenses, and profits.

Depreciation Expense

The allocated portion of the cost of a tangible asset over its useful life, recognized as an expense on a company's income statement.

General Liability Insurance

General Liability Insurance is a type of insurance policy that provides cover to a business for bodily injury, personal injury, and property damage caused by the business’s operations, products, or injuries that occur on the business’s premises.