91Ó°ÊÓ

Waste Industries is evaluating a \(70,000 project with the following cash flows:

Years Cash Flows

1 ................................ \)11,000

2 ................................ 16,000

3 ................................ 21,000

4 ................................ 24,000

5 ................................ 30,000

The coefficient of variation for the project is 0.847.

Based on the following table of risk-adjusted discount rates, should the project be undertaken? Select the appropriate discount rate and then compute the net present value.

Coefficient of Variation Discount Rate

0–0.25 ................................. 6%

0.26–0.50 ................................. 8

0.51–0.75 ................................. 10

0.76–1.00 ................................. 14

1.01–1.25 ................................. 20

Step by step solution

01

Determining the discount rate-

Applicable coefficient of variation is 0.847 so the corresponding discount rate will be 14% as it ranges between 0.76-1.00.

02

Computation of Net present value

Year	a.Cash Flow	b.Discount factor [1/(1+r)n]	Present value (a*b)
0	($70,000)	1	($70,000)
1	$11,000	0.877192	9,649.11
2	$16,000	0.769467	12,311.47
3	$21,000	0.674971	14,174.39
4	24,000	0.592080	14,209.92
5	30,000	0.519368	15,581.04
			($4,074.07)

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