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 Blue Hamster Manufacturing Inc. is evaluating a proposed capital budgeting project (project Beta) that wil require an initial investment of $3,225,000. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $375,000 Year 2 $400,000 Year 3 $425,000 Year 4 $450,000 Blue Hamster Manufacturing Inc.'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 O -$1,447,322 O -$1,472,322 O -$1,897,322 O-$1,497,322 Making the accept or reject decision Blue Hamster Manufacturing Inc.'s decision to accept or reject project Beta is independent of Rs decisions on other projects. If the firm follows the NPV method, it should project Beta The internal rate of return (IRR) refers to the compound annual rate of return that a project generates based on its up-front cost and subsequent cash flows. Consider the case of Fuzzy Badger Transport Company: Consider the following case: Fuzzy Badger Transport Company is evaluating a proposed capital budgeting project (project Sigma) that will require an initial investment of $750,000. Fuzzy Badger Transport Company has been basing capital budgeting decisions on a project's NPV; however, its new CFO wants to start using the IRR method for capital budgeting decisions. The CFO says that the TRR is a better method because returns in percentage form are easier to understand and compare to required returns. Fuzzy Badger Transport Company's WACC is 10%, and project Sigma has the same risk as the firm's average project. The project is expected to generate the following net cash flows Which of the following is the correct calculation of project Sigma's IRR? Year Cash Flo Year 1 $350,000 Year 2 $475,000 Year 3 $400,000 Year 4 $475,000 36.90% 32.80% Q 38.95% 41.00% If this is an independent project, the IRR method states that the firm should accept project sigma If mutually exdusive projects are proposed that both have an IRR greater than the necessary WACC, the IRR method states that the firm should accept O The project with the greater future cash inflows, assuming that both projects have the same risk as the firm's average project firm's average project project O The project that requires the lowest initial investment, assuming that both projects have the same risk as the O The project with the greatest IRR, assuming that both projects have the same risk as the fim's average