* Answer All Four *

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 analysis-which occurs before any evaluation method is applied-involves estimating the 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 Celestial Crane Cosmetics is evaluating a proposed capital budgeting project (project Alpha) that will require an initial Investment of $500,000. The project is expected to generate the following net cash flows: Year Cash Flow $350,000 Year! Year 2 500,000 Year 3 425,000 Year 4 425,000 Celestial Crane Cosmetics's weighted average cost of capital is 10%, and project Alpha has the same risk as the firm's average project. Based on the cash flows, what is project Alpha's net present value (NPV)7 (Note: Do not round your intermediate calculations.) $740,994 $1,340,994 $1,240,994 $1,165,994 Making the accept or reject decision Celestial Crane Cosmetics's decision to accept or reject project Alpha Is Independent of its decisions on other projects. If the firm follows the NPV method, it should project Alpha Which of the following statements best explains what it means when a project has an NPV of 50% When a project has an NPV of 30, the project is earning a rate of return equal to the project's welohted average cost of capital. It's OK to accept a project with an NPV of 50, because the project is earning the required minimum rate of return When a project has an NPV of so, the project is earning a profile of $0. A firm should relect any project with an NPV of $0, because the project is not profitable When a project has an NPV of so, the project is earning a rate of return less than the projects weighted average cost of capital. Its OK to accept the project, as long as the project's profit is positive