Reference no: EM133059638
The Basics of Capital Budgeting: NPV
NPV
The net present value (NPV) method estimates how much a potential project will contribute to -Select-business ethics shareholders' wealth employee benefits Correct 1 of Item 1, and it is the best selection criterion. The -Select-smaller larger Correct 2 of Item 1 the NPV, the more value the project adds; and added value means a -Select-higher lower Correct 3 of Item 1 stock price. In equation form, the NPV is defined as:
CFt is the expected cash flow at Time t, r is the project's risk-adjusted cost of capital, and N is its life, and cash outflows are treated as negative cash flows. The NPV calculation assumes that cash inflows can be reinvested at the project's risk-adjusted -Select-rdrs WACC Correct 4 of Item 1. When the firm is considering independent projects, if the project's NPV exceeds zero the firm should -Select-accept reject Correct 5 of Item 1 the project. When the firm is considering mutually exclusive projects, the firm should accept the project with the -Select-lowest positive lowest negative highest positive highest negative Correct 6 of Item 1 NPV.
Quantitative Problem: Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 9%.
|
|
0
|
1
|
2
|
3
|
4
|
|
Project A
|
-920
|
650
|
395
|
230
|
280
|
|
Project B
|
-920
|
250
|
330
|
380
|
730
|
What is Project A's NPV? Round your answer to the nearest cent. Do not round your intermediate calculations.
What is Project B's NPV? Round your answer to the nearest cent. Do not round your intermediate calculations
If the projects were independent, which project(s) would be accepted?
-Select-Neither Project A Project B Both projects A and B Correct 1 of Item 3
If the projects were mutually exclusive, which project(s) would be accepted?
-Select-Neither Project A Project B Both projects A and B Correct 2 of Item 3