Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

2. The Basics of Capital Budgeting: Evaluating Cash Flows: NPV The Basics of Capital Budgeting: Evaluating Cash Flows: NPV The net present value (NPV) method

2. The Basics of Capital Budgeting: Evaluating Cash Flows: NPV

The Basics of Capital Budgeting: Evaluating Cash Flows: NPV

The net present value (NPV) method estimates how much a potential project will contribute to -Select-business ethicsshareholders' wealthemployee benefitsCorrect 1 of Item 1, and it is the best selection criterion. The -Select-smallerlargerCorrect 2 of Item 1 the NPV, the more value the project adds; and added value means a -Select-higherlowerCorrect 3 of Item 1 stock price. In equation form, the NPV is defined as:

CFt is the expected net cash flow at Time t, r is the project's risk-adjusted cost of capital, N is its life, and cash outflows are treated as negative cash flows. The NPV calculation assumes that cash inflows can be reinvested at the project's risk-adjusted -Select-rd rs WACCCorrect 4 of Item 1. When the firm is considering independent projects, if the project's NPV exceeds zero the firm should -Select-acceptrejectCorrect 5 of Item 1 the project. When the firm is considering mutually exclusive projects, the firm should accept the project with the -Select-lowest positivelowest negativehighest positivehighest negativeCorrect 6 of Item 1 NPV. Quantitative Problem: Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 10%.

0 1 2 3 4
Project A -1,190 650 340 250 300
Project B -1,190 250 275 400 750

What is Project A's NPV? Do not round intermediate calculations. Round your answer to the nearest cent.

$

What is Project B's NPV? Do not round intermediate calculations. Round your answer to the nearest cent.

$

If the projects were independent, which project(s) would be accepted?

-Select-Neither projectProject AProject BBoth projects A and BCorrect 1 of Item 3 would be accepted.

If the projects were mutually exclusive, which project(s) would be accepted?

-Select-Neither projectProject AProject BBoth projects A and BCorrect 2 of Item 3 would be accepted.

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_2

Step: 3

blur-text-image_3

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

Economics And Personal Finance

Authors: Irvin Tucker, Joan Ryan

1st Edition

1133562108, 978-1133562108

More Books

Students also viewed these Finance questions

Question

How does your language affect the way you think?

Answered: 1 week ago