Suppose Happy Dog Soap Company is evaluating a proposed capital budgeting projec

Question

Suppose Happy Dog Soap Company is evaluating a proposed capital budgeting project (project Alpha) that will require an initial investment of $600,000. The project is expected to generate the following net cash flow: Happy Dog Soap Company's weighted average cost of capital is 9%, 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 (NPN)? Happy Dog Soap Company's decision to accept or reject project Alpha is independent of its decision on other projects. If the firm follows the NPV method, it should project Alpha. Which of the following statements best explain what it means when a project has an NPV of $0? 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. It's OK to accept a project with an NPV of $0, because the project is earning the required minimum rate of return. When a project has an NPV of $0, the project is earning a rate of return less than the project's weighted

Explanation / Answer

NPV = -$600,000 + [($300,000)/(1.09)] + [($475,000)/(1.09)2] + [($475,000)/(1.09)3] + [($450,000)/(1.09)4] = $760,605.85

So, Option 2 is correct.

Based on NPV method, the project should be accepted.

When a project has an NPV of $0, the project is earning a rate of return equal to its weighted average cost of capital. It's OK to accept the project.

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.