1. Net present value (NPV) 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 Fuzzy Button Clothing Company is evaluating a proposed capital budgeting project (project Beta) that will require an initial investment of $2.225,000. The project is expected to generate the following net cash flows: Year Year 1 Year 2 Cash Flow $325,000 $500,000 $425,000 $500,000 Year 3 Year 4 Fuzzy Button Clothing Company'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? -$756,168 -$431,168 O -$331,168 -$256.168 Making the accept or reject decision Fuzzy Button Clothing Company'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 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 Als larger than the sum of cash inflows of project B. A coworker told you that you don't need to do an NPV analysis of the projects because you already know that project will have a larger NPV than projecte. Do you agree with your coworker's statement Yes, project A will always have the largest NPV because its cash inflows are greater than projectes casinos No, the NPV calculation will take into account not only the projects cash flows but also the timing of cash now and outflows Consequently, project could have a larger NPV than project Atven though project A has targer cash inflows the NPV calculation is based on percentage retums, so the site of a projects how does not affect projects