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 Green Caterpillar Garden Supplies Inc. is evaluating a proposed capital budgeting project $($project Beta$)$ that will require an

initial investment of $$2,750,000.$ The project is expected to generate the following net cash flows:

Year $3$$$450,000$

Year $4$$$475,000$

Green Caterpillar Garden Supplies Inc.$\text{'}$s weighted average cost of capital is $7\%,$ and project Beta has the same risk as the firm's average project.

Based on the cash flows, what is project Beta's NPV$?$

$-$$$1,586,371$

$-$$$1,321,976$

$-$$$871,976$

$-$$$896,976$

Making the accept or reject decision

Green Caterpillar Garden Supplies Inc.$\text{'}$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

project Beta.

Suppose your boss has ask

$,$ analyze two mutually exclusive projects$-$project A and project $B.$ Both projects require the same investment

amount, and the sum of ca accept s 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 Decduse you already know that project A will have a larger NPV than project B$.$ Do you agree with your coworker's

statement?

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$.$

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.

Yes, project A will always have the largest NPV$,$ because its cash inflows are greater than project B$\text{'}$s cash inflows.