1: Assignment - The Basics of Capital Budgeting 1. Net present value (NPy) Evaluating cash flows with the NPV method The net prosent value (NPV) rule is considered one of the most common and preferred criteria that generally lead to good investment decisions. Consider this case: Suppose Cute Camel Woodcraft Company is evaluating a proposed capital budgeting project (project Alpha) that will require an initial investment of $600,000. The project is expected to generate the following net cash flows: Cute Camel woodcraft Company's weighted average cost of capital is.7\%, and project Alpha has the same risk as the firm's aversge project. Based on the cash flows, what is prolect. Alphas net present value (NPV)? Cute Camel Woodcraft Company's weighted average cost of capital is 7\%, and project Alpha has the same risk as the firm's average project. Based on the cash flows, what is project Apha's net present value (NPV)? $1,385,680 $785,680 $1,260,680 $942,816 Making the accept or reject decision Cute Camel Woodcraft Company's decision to accept or reject project Alpha is independent of its decisions on other projects. If the firm follows the NPV method, it should project Alpha. Which of the following statements best explains what it means when a project has an NPV of 50 ? When a prolect has an NPV of 50 , the profect is earning a profit of 50 . A firm should refect anv projoct with an NPV of so, becaue the project is not profitable. When a profect has an NFV of So, the project is earning a rate of return less than the project's weighted average cost of capital. it s ok to accept the project, as fong as the project's profit is positive. Ch 11: Assignment - The Basics of Capital Budgeting $1,260,680 $942,816 Making the accept or reject decision Cute Camel Woodcraft Company's decision to accept or reject project Alpha is independent of its decisions on other projects. If the firm follows the NPV method, it should project Alpha. Which of the following statements best explains what it means when a prolect has an NPV of 50 ? When a project has an NPV of 50 , the project is earning a profit of so. A firm should reject any project with an NPV of so, because the profect is not profitable. When a project has an NPV of 50 , the project is earnino a rate of return less than the pr Nect w weiphted awerage cost of capital, itw ok to accept the project, as long as the grofect's profit is positive. When a project has an NPV of so, the profect is earning a rate of return equal to the profect's weighted average cost of capitat. Its oK to accept a project with an NPV of so, because the project is eaming the reacired minimum rate of return