Please answer All of the questions please and thank you Evaluating cash flows wi

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Please answer All of the questions please and thank you



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. Suppose Blue Hamster Manufacturing Inc. 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 $375,000 Year 2 $425,000 Year 3 $450,000 Year 4 $450,000 Blue Hamster Manufacturing Inc.'s cost of capital is 9%, 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 -$1,301,771 -$1,131,975 O -$3,631,975 O -$706,975 Making the accept or reject decision Blue Hamster Manufacturing Inc.'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

Present Value = Future value/ ((1+r)^t) where r is 9% and t is the time period Net present value (NPV) = sum of present values Year 0 1 2 3 4 cash flow -2500000 375000 425000 450000 450000 Present value -2500000 344036.7 357714 347482.6 318791.3 Net Present value (NPV) -1131975 If the firm folllows the NPV method it should REJECT project Beta. If the NPV is positive, the firm can accept the project. No the NPV calculation will take into account not only the cash inflows but also the timing of the cash inflows and outflows. Since NPV is the sum of present values, the NPV calculation will depend on the present values of future cash flows and not just the size of the cash flows.

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