1. The Federal Reserve recently shifted its monetary policy, causing Lasik Vision's WACC to change. Lasik had recently analyzed the project whose cash flows are shown below. However, the CFO wants to reconsider this and all other proposed projects in view of the Fed action. How much did the changed WACC cause the forecasted NPV to change? Assume that the Fed action does not affect the cash flows, and note that a project's projected NPV can be negative, in which case it should be rejected.

Question

1. The Federal Reserve recently shifted its monetary policy, causing Lasik Vision's WACC to change. Lasik had recently analyzed the project whose cash flows are shown below. However, the CFO wants to reconsider this and all other proposed projects in view of the Fed action. How much did the changed WACC cause the forecasted NPV to change? Assume that the Fed action does not affect the cash flows, and note that a project's projected NPV can be negative, in which case it should be rejected.

New WACC:7.00% Old WACC: 10.00%
Year: 0 1 2 3
Cash flows: -$1,000 $500 $520 $540

Answer 1

To determine how much the changed WACC caused the forecasted NPV to change, we need to calculate the NPV using both the old and new WACC and compare the results.

First, let's calculate the NPV using the old WACC of 10%. The formula for NPV is:

NPV = (CF0 / (1 + r)^0) + (CF1 / (1 + r)^1) + (CF2 / (1 + r)^2) + (CF3 / (1 + r)^3)

Where CF0, CF1, CF2, and CF3 are the cash flows for year 0, 1, 2, and 3 respectively, and r is the discount rate (WACC).

Using the old WACC of 10% and the provided cash flows ($-1,000, $500, $520, $540), the NPV is calculated as follows:

NPV (old WACC) = (-$1,000 / (1 + 0.10)^0) + ($500 / (1 + 0.10)^1) + ($520 / (1 + 0.10)^2) + ($540 / (1 + 0.10)^3)

Simplifying the equation, we get:

NPV (old WACC) = -$1,000 + $454.55 + $429.75 + $412.09

NPV (old WACC) = $297.39

Now, let's calculate the NPV using the new WACC of 7%. Using the same formula and the provided cash flows, the NPV is calculated as follows:

NPV (new WACC) = (-$1,000 / (1 + 0.07)^0) + ($500 / (1 + 0.07)^1) + ($520 / (1 + 0.07)^2) + ($540 / (1 + 0.07)^3)

Simplifying the equation, we get:

NPV (new WACC) = -$1,000 + $467.29 + $435.07 + $403.98

NPV (new WACC) = $306.34

To determine how much the changed WACC caused the forecasted NPV to change, we can simply subtract the NPV calculated with the old WACC from the NPV calculated with the new WACC:

Change in NPV = NPV (new WACC) - NPV (old WACC)

Change in NPV = $306.34 - $297.39

Change in NPV = $8.95

Therefore, the changed WACC caused the forecasted NPV to change by $8.95.

72.27

To determine how much the changed WACC caused the forecasted NPV to change, we need to calculate the NPV using both the old and new WACC and compare the results.