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1. Net present value (NPV) The capital budgeting process is comprehensive and is based on certain assumptions, models, and benchmarks. This process often begins with

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1. Net present value (NPV) The capital budgeting process is comprehensive and is based on certain assumptions, models, and benchmarks. This process often begins with a project analysis. Generally, the first step in a capital budgeting project analysis-which occurs before any evaluation method is applied involves estimating the project's expected cash flows Evaluating cash flows with the NPV method The ser 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 Hungry Whale Electronics 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 Year 1 Year 2 Year 2 Year 4 Cash Flow $350,000 450,000 500,000 450,000 Hungry Whale Electronics's weighted average cost of capital is 9%, and project Beta has the same risk as the firm's average project. Based on the cash flows, what is project Beta's NPV? (Note: Do not round your intermediate calculations.) O $595,260 0 $3,595,260 O $1,095,260 0 $1,259,549 Making the accept or reject decision Hungry Whale Electronics'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 Sta. Which of the following statements best explains what it means when a project has an NPV of SO? When a project has an NP of $0, the project is eaming a rate of return less than the project's weighted average cost of capital. It's OK to accept the project, as long as the project's profit is positive. When a project has an NP of $0, the project is caring a rate of retum equal to the project's weighted average cost of capital. It's OK to accept a project with an NPV of so, because the project is earning the required minimum rate of retum When a project has an NPV of $0, the project is caring a profit of $0. A firm should reject any project with an NPV of $0, because the project is not profitable. Save & Continue Continue without saving

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