Reference no: EM133072421
Evaluating cash flows with the NPV method
The net present value (NPV) rule is considered one of the most common and preferred criteria that generally lead to good investment decisions.
Consider this case:
Suppose Lumbering Ox Truckmakers is evaluating a proposed capital budgeting project (project Beta) that will require an initial investment of $3,000,000. The project is expected to generate the following net cash flows:
|
Year
|
Cash Flow
|
|
Year 1
|
$275,000
|
|
Year 2
|
$425,000
|
|
Year 3
|
$475,000
|
|
Year 4
|
$475,000
|
Lumbering Ox Truckmakers's weighted average cost of capital is 7%, and project Beta has the same risk as the firm's average project. Based on the cash flows, what is project Beta's NPV?
-$1,864,911
-$1,945,994
-$1,621,662
-$1,146,662
Making the accept or reject decision
Lumbering Ox Truckmakers's decision to accept or reject project Beta is independent of its decisions on other projects. If the firm follows the NPV method, it should ( accept, reject) project Beta.
Suppose your boss has asked you to analyze two mutually exclusive projects-project A and project B. Both projects require the same investment amount, and the sum of cash inflows of Project A is larger than the sum of cash inflows of project B. A coworker told you that you don't need an NPV analysis of the projects because you already know that project A will have a larger NPV than project B. Do you agree with your coworker's statement?
No, the NPV calculation is based on percentage returns, so the size of a project's cash flows does not affect a project's NPV.
Yes, project A will always have the largest NPV, because its cash inflows are greater than project B's cash inflows.
No, the NPV calculation will take into account not only the projects' cash inflows but also the timing of cash inflows and outflows. Consequently, project B could have a larger NPV than project A, even though project A has larger cash inflows.
|
What is the value of the stock today
: A stock in your portfolio has just paid a dividend of $0.50. You expect the dividend to grow to $1.00 next year, to $1.50 the year after, and to $2.00 the year
|
|
Estimate the enterprise value of heavy metal
: Heavy Metal Corporation is expected to generate the following free cash flows over the next five? years:
|
|
Prepare an environmental cost analysis of the existing cost
: Prepare an environmental cost analysis of the existing cost of $91,173, highlighting prevention, appraisal, and internal and external failure costs
|
|
Prepare the cash at bank ledger account as at july
: The post-closing trial balance of Peter's Lawn Services as at 30 June 2021 is as follows: Prepare the cash at bank ledger account as at 31 July 2021
|
|
Evaluating cash flows with the npv method
: The net present value (NPV) rule is considered one of the most common and preferred criteria that generally lead to good investment decisions.
|
|
Address any social issue
: Address any social issue associated to the structure of the family - essay focuses on influencing readers of a point/an assertion based on evidence.
|
|
What is the smallest expected loss
: What is the smallest expected loss over the next year with a probability of 1 percent? Does this number make sense?
|
|
Compute cash flow using the following format
: Assume a corporation has earnings before depreciation and taxes of $102,000, depreciation of $40,000, and that it has a 35 percent tax bracket.
|
|
How will traders arbitrage
: There is a T-bill futures contract expiring in 70 days being traded. The 91-day T-bill yield is 3.44%, the 161-day T-bill yield is 0.1%, and the risk-free rate
|