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 $400,000. The project is expected to generate the following net cash flows:

Year	Cash Flow
Year 1	$300,000
Year 2	$400,000
Year 3	$450,000
Year 4	$425,000

Celestial Crane Cosmeticss weighted average cost of capital is 7%, and project Alpha has the same risk as the firms average project. Based on the cash flows, what is project Alphas net present value (NPV)?

a. $1,221,314

b. $1,346,314

c. $921,314

d. $1,321,314

Making the accept or reject decision

Celestial Crane Cosmeticss decision to accept or reject project Alpha is independent of its decisions on other projects. If the firm follows the NPV method, it should ACCEPT OR DENY project Alpha.