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 Green Caterpillar Garden Supplies Inc. is evaluating a proposed capital budgeting project (project Beta) that will require an initial investment of $2,500,000. The project is expected to generate the following net cash flows:

Year	Cash Flow
Year 1	$375,000
Year 2	$500,000
Year 3	$450,000
Year 4	$400,000

Green Caterpillar Garden Supplies Inc.s weighted average cost of capital is 8%, and project Beta has the same risk as the firms average project. Based on the cash flows, what is project Betas NPV?

-$1,072,872

-$3,572,872

-$622,872

-$697,872

Making the accept or reject decision

Green Caterpillar Garden Supplies Inc.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.