Net Present Value (NPV)

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 Black Sheep Broadcasting Company is evaluating a proposed capital budget project (project alpha) that will require an initial investment of $450,000. The project is expected to generate the following net cash flows:

Year Cash Flow

Year 1 $375,000

Year 2 $400,000

Year 3 $500,000

Year 4 $475,000

Black Sheep Broadcasting Company's weighted average cost of captial is 7%, 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)?

1. Net present value (NPV) Evaluating cash flows with the NPV method The net prosent value (NPV) rule is considered one of the most common and preferred criteria that generally lead to good investment decisions. Consider this case: Suppose Black Sheep Broadcasting Company is evaluating a proposed capital budgeting project (project Alpha) that will require an initial Investment of $450,000. The project is expected to generate the following net cash flows: Year Cash Flow $375,000 Year 1 Year 2 $400,000 Year 3 $500,000 Year 4 $475,000 Black Sheep Broadcasting Company's weighted average cost of capital is 7%, 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) $1,495,367 O $570,367 $1,020,362 O $1,520,367 Making the accept or reject decision Black Sheep Broadcasting Company decision to accept or relect project Alpha Is independent of its desions on other projects. If the firm follows the NPV method, it should Na project Alpha reject Which of the following best explains what it means when project has an No accept When a pro NPV of so, the onset is eaming te return equal to the project delanted rage cost of capital. Its ok to Making the accept or reject decision Black Sheep Broadcasting Company'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 w project Alpha. Which of the following statements best explains what it means when a project has an NPV of $07 When a project has an NPV of so, the project is earning a rate of return equal to the project's weighted average cost of capital. It's OK to accept a project with an NPV of so, because the project is earning the required minimum rate of return. When a project has an NPV of so, the project is earning a rate of return less than the project's weighted average cost of capital. It's ok to accept the project, as long as the project's profit is positive. When a project has an NPV of so, the project is earning a profit or so. A firm should reject any project with an NPV of 50 because the project is not profitable