Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

1. The net present value (NPV) rule is considered one of the most common and preferred criteria that generally lead to good investment decisions. Consider

1. 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 Cute Camel Woodcraft 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

Cash Flow

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

Cute Camel Woodcraft Companys weighted average cost of capital is 7%, and project Beta has the same risk as the firms average project. Based on the cash flows, what is project Betas NPV?

-$323,705

-$889,761

-$398,705

-$773,705

Making the accept or reject decision

Cute Camel Woodcraft Companys 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 projectsproject A and project B. Both projects require the same investment amount, and the sum of cash inflows of Project A is larger than the sum of cash inflows of project B. A coworker told you that you dont need to do an NPV analysis of the projects because you already know that project A will have a larger NPV than project B. Do you agree with your coworkers statement?

No, the NPV calculation is based on percentage returns, so the size of a projects cash flows does not affect a projects NPV.

No, the NPV calculation will take into account not only the projects cash inflows but also the timing of cash inflows and outflows. Consequently, project B could have a larger NPV than project A, even though project A has larger cash inflows.

Yes, project A will always have the largest NPV, because its cash inflows are greater than project Bs cash inflows.

Grade It Now

Save & Continue

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Essential Personal Finance A Practical Guide For Students

Authors: Lien Luu, Jonquil Lowe, Jason Butler, Tony Byrne

1st Edition

1138692956, 978-1138692954

More Books

Students also viewed these Finance questions

Question

Employ effective vocal cues Employ effective visual cues

Answered: 1 week ago