NET PRESENT VALUE (NPV) 1. The capital budgeting process is comprehensive and is
ID: 2383478 • Letter: N
Question
NET PRESENT VALUE (NPV)
1. The capital budgeting process is comprehensive and is based on certain assumptions, or models and benchmarks that a company follows.This process often begins with a project analysis. Generally, the first step in project analysis before using any evaluation method is to estimate the ________.
a. Revenues from all project
b. Company’s net income
c. Projects expected cashflow
2. Suppose Blue Hamster Manufacturing Inc, is evaluation a proposed capital budgeting project (project alpha) that will require an initial investment of $500,000. The project is expected to generate the following net cash flows:
Year
Cash Flow
Year 1
$325,000
Year 2
$425,000
Year 3
$450,000
Year 4
$400,000
Blue Hamster Manufacturing Inc’s weighted average cost of the 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)?
a. $871,690
b. $1,157,991
c. $1,182,991
d. $757,991
3. Blue Hamster Manufacturing Inc’s decision to accept or reject project Alpha is independent of its decisions on other projects. If the firms follows the NPV method, it should ______ project alpha
a. Accept
b. Reject
4. Which of the following statements best explains what it mean when a project has an NPV of $0?
a. 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.
b. 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. Its Ok to accept the project, as long as the project’s profit is positive.
c. 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. Its Ok to accept the project with an NPV of $0, because the project is earning the required minimum rate of return.
Year
Cash Flow
Year 1
$325,000
Year 2
$425,000
Year 3
$450,000
Year 4
$400,000
Explanation / Answer
The correct answer is
c. Projects expected Cash Flows
First of all in Capital Budgeting Decisions we should find out the Net Present Values for which we should know the expected cash flows.
2. NPV – Net Present value
NPV = cash Inflows- cash Outflows
NPV = Cash Flow(PVAF, 10%, Life)
NPV = 325000*.909+425000*.826+450000*.751+400000*.683-500000
NPV = 295425+351050+300400+273200-500000
NPV = $ 757991
The correct answer is d. $ 757991
3. The project should be accepted due to thr Positive NPV
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