Last Month, Standard Systems Analyzed the Project Whose Cash Flows

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. $\begin{array} { l c c c c } \text { Old r: } & 10.00 \% & \text { New r: } & 11.25 \% \\\text { Year } & 0 & 1 & 2 & 3 \\\text { Cash flows } & - \$ 1,000 & \$ 410 & \$ 410 & \$ 410\end{array}$

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

Correct Answer:

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