2. 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 analysiswhich occurs before any evaluation method is appliedinvolves estimating the project's expected cash flows Evaluating cash flows with the NPV method The net present value (IPV) rule is considered one of the most common and preferred criteria that generally lead to good investment decisions. Consider this case: Suppose Pheasant Pharmaceuticals 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 Cash Flow $325,000 400,000 Year 2 Year 3 Year 4 475,000 400,000 Pheasant Pharmaceuticals'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 -$1,458,007 O $1,284,994 O -$1,215,006 O -$1,397,257 Making the accept or reject decision Pheasant Pharmaceuticals'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. Which of the following statements best explains what it means when a project has an NPV of $0? O when a project has an NPV 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 long as the project's profit is positive. O when a project has an NPV of 50, the project is earning a rate of return equal to the project's weighted average cost of capital. It's OK to accept a project with an NPV of $0, because the project is earning the required minimum rate of return. O when a project has an NPV of so, the project is earning a profit of $0. A firm should reject any project with an NPV of $0, because the project is not profitable. Grade It Now Save & Continue Continue without saving