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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
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 Year 1 Cash Flow $275,000 $425,000 Year 2 Year 3 $500,000 Year 4 $475,000 The company's weighted average cost of capital is 10%, 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)? $1,301,328 $401,328 O $851,328 $1,326,328 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 project Alpha. Which of the following statements best explains what it means when a project has an NPV of $0? When a project has an NPV of $0, 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 $0, because the project is earning the required minimum rate of return. When a project has an NPV of $0, the project is earning a profit of $0. A firm should reject any project with an NPV of $0, because the project is not profitable. When a project has an NPV of $0, 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. Underwood Manufacturing is evaluating a proposed capital budgeting project that will require an initial investment of $108,000. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 Year 2 $35,800 $50,200 $44,100 $40,400 Year 3 Year 4 Assume the desired rate of return on a project of this type is 10%. What is the net present value of this project? (Note: Do not round intermediate calculations.) $10,285.40 -$26,579.10 - $7,244.50 $26,759.78 Suppose Underwood Manufacturing has enough capital to fund the project, and the project is not competing for funding with other projects. Should Underwood Manufacturing accept or reject this project? Reject the project Accept the project
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