Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Suppose Hungry Whale Electronics is evaluating a proposed capital budgeting project (project Beta) that will require an initial investment of $3,225,000. The project is expected

Suppose Hungry Whale Electronics is evaluating a proposed capital budgeting project (project Beta) that will require an initial investment of $3,225,000. The project is expected to generate the following net cash flows:

YearCash FlowYear 1$350,000Year 2$425,000Year 3$400,000Year 4$425,000

Hungry Whale Electronics'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?

-$1,964,772

-$1,564,772

-$2,259,488

-$5,189,772

Making the accept or reject decision

Hungry Whale Electronics's decision to accept or reject project Beta is independent of its decisions on other projects. If the firm follows the NPV method, it should________ (accept/reject) project Beta.

Suppose your boss has asked you to analyze two mutually exclusive projectsproject A and project B. Both projects require the same investment amount, and the sum of cash inflows of Project A is larger than the sum of cash inflows 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 A will have a larger NPV than project B. Do you agree with your coworker's statement?

A) Yes, project A will always have the largest NPV, because its cash inflows are greater than project B's cash inflows.

B) 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 B could have a larger NPV than project A, even though project A has larger cash inflows.

C) No, the NPV calculation is based on percentage returns, so the size of a project's cash flows does not affect a project's NPV.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Investment Analysis and Portfolio Management

Authors: Frank K. Reilly, Keith C. Brown

10th Edition

538482109, 1133711774, 538482389, 9780538482103, 9781133711773, 978-0538482387

More Books

Students also viewed these Finance questions

Question

Contrast positive motivation with negative motivation.

Answered: 1 week ago