tempts: Keep the Highest: /2 1. Net present value (NPV) AaAa ? Evaluating cash f

ID: 2619596 • Letter: T

Question

tempts: Keep the Highest: /2 1. Net present value (NPV) AaAa ? Evaluating cash flows with the NPV method 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 $2,225,000. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $375,000 Year 2 $475,000 Year 3 $450,000 Year 4 $425,000 Green Caterpillar Garden Supplies Inc.'s weighted average cost of capital is 10%, and as the firm's average project. Based on the cash flows, what is project Beta's NPV? project Beta has the same risk O-$863,157 O -$413,157 O -$1,035,788 O -$388,157 Making the accept or reject decision Green Caterpillar Garden Supplies Inc.'s decision to accept or reject project Beta is independent of its decisions on other projects. If the firm tollows the NPV method, it should project Beta. MacBook A

Explanation / Answer

Answer:

Year

Cash Flow

Discount Factor @ 10%

Present Value

-2225000

375000

0.90909

340908.75

475000

0.82645

392563.75

450000

0.75131

338089.5

425000

0.68301

290279.25

NPV

-863158.75

Net Present Value = Present Value of Cash Inflow – Present Value of Investment

= 1,361,841.25 – 2,225,000

= ($ 863,158.75)

As the NPV of the project is negative, it is not worthwhile to accept the proposal.