Suppose Happy Dog Soap Company is evaluating a proposed capital budgeting projec
ID: 2562745 • Letter: S
Question
Suppose Happy Dog Soap Company is evaluating a proposed capital budgeting project (project Beta) that will require an initial investment of $2,500,000. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $350,000 Year 2 $475,000 Year 3 $450,000 Year 4 $400,000 Happy Dog Soap Company'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? O -$635,522 O $1,414,478 O-$1,248,350 -$1,085,522 Making the accept or reject decision Happy Dog Soap Company'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.Explanation / Answer
Year
Cash flow
PV Factor@ 7%
PV
1
$ (2,500,000)
1/(1+0.7)0
1.0000
$ (2,500,000.00)
2
$ 350,000
1/(1+0.7)1
0.9346
$ 327,102.80
3
$ 475,000
1/(1+0.7)2
0.8734
$ 414,883.40
4
$ 450,000
1/(1+0.7)3
0.8163
$ 367,334.04
5
$ 400,000
1/(1+0.7)4
0.7629
$ 305,158.08
NPV
$ (1,085,521.67)
NPV of project Beta is $ (1,085,521.67) or $ (1,085,522).
Hence option 4th “- $ 1,085,522" is correct answer.
As the project has negative NPV at company’s WACC, Beta should be rejected.
Year
Cash flow
PV Factor@ 7%
PV
1
$ (2,500,000)
1/(1+0.7)0
1.0000
$ (2,500,000.00)
2
$ 350,000
1/(1+0.7)1
0.9346
$ 327,102.80
3
$ 475,000
1/(1+0.7)2
0.8734
$ 414,883.40
4
$ 450,000
1/(1+0.7)3
0.8163
$ 367,334.04
5
$ 400,000
1/(1+0.7)4
0.7629
$ 305,158.08
NPV
$ (1,085,521.67)
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