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 Pheasant Pharmaceuticals in evaluating a proposed capital budgeting project project Beta) that will require an initial investment of 53,225,000. The project is expected to generate the following net cash flows: Year Yeart Cash Flow $300.000 $400,000 $450,000 Year Year Year $425,000 Pheasant Pharmaceuticals's weighted average cost of capitals and project Beta has the same risk as the firm's average project. Based on the cash flow, what is project Beta's NPV 31,934,674 -51,634,674 -51,534,674 $1,509,674 Making the accept or reject decision Pheasant Pharmaceutical decision to accet or reject project it is independent of its deacons on other projects the nem follows the NPV method, it should project Beta 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 Suppose your boss has asked you to analyze two mutually exclusive projects-project and project B. Both projects require the same investment amount, and the sum of cash inflows of Project is larger than the sum of cash inflows of project B. A coworker told you that you don't need to do an NPV analysis of the projects because you already know that project A will have a larger NPV than projects. Do you agree with your coworker's statement? 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 targest NPV, because its cash inflows are greater than project B's cash innows. No, the NPV calculation is based on percentage returns, so the size of a project's cash flows does not affect a project's NPV