Suppose Blue Hamster Manufacturing Inc, is evaluation a proposed capital budgeti

Question

Suppose Blue Hamster Manufacturing Inc, is evaluation a proposed capital budgeting project (project alpha) that will require an initial investment of $400,000. 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

$475,000

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. $973,267

b. $1,448,267

c. $1,423,267

d. $573,267

Year

Cash Flow

Year 1

$350,000

Year 2

$475,000

Year 3

$450,000

Year 4

$475,000

Explanation / Answer

Weighted average cost of capital = 10% Calculation of project Alpha's Net Present Value Year Cash flow PV factor @ 10% PV 0 -400000 1                         -4,00,000 1 350000 0.909090909                           3,18,182 2 475000 0.826446281                           3,92,562 3 450000 0.751314801                           3,38,092 4 475000 0.683013455                           3,24,431                           9,73,267 NPV = $973267

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