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1. Net present value (NPV) Evaluating cash flows with the NPV method The net present value (PV) rule is considered one of the most common and preferred criteria that generally lead to good investment decisions Consider this case: R Suppose Celestial Crane Cosmetics is evaluating a proposed capital budgeting project (project Beta) that will require an initial a investment of $3,000,000. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $375,000 $450,000 Year 2 Year 3 $425,000 $475,000 Year 4 Celestial Crane Cosmetics's weighted average cost of capital is 10%, 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 $1,356,550 0-$1,643,450 $4,643,450 Ch 11: Assignment - The Basics of Capital Budgeting cash flows, what is project Deta's NPV? 0 $1,356,550 -$1,643,450 O $4,643,450 O $1,972,140 Making the accept or reject decision Celestial Crane Cosmetics decision to act or reject project detais independent of te 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 A and project B. Both projects require the same investment amount, and the sum of cash flows of Project A is larger than the sum of cash flow 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 will have a larger NPV than project . Do you agree with your coworkers 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 could have a larger NPV than project A, even though project has larger cash intlow No, the NPV calculation is based on percentage returns, so the size of a project's cash flows does not affect a project's NP. Yes, project A will always have the largest NPV, because its cashindows are preater than project t's cashiellows