Suppose Cold Goose Metal Works Inc. is evaluating a proposed capital budgeting p

Question

Suppose Cold Goose Metal Works Inc. is evaluating a proposed capital budgeting project (project Alpha) that will require an initial investment of $450,000. The project is expected to generate the following net cash flows Year Cash Flow Year 1 $325,000 Year 2 $425,000 Year 3 $475,000 Year 4 $475,000 Cold Goose Metal works Inc.'s weighted average cost of capital is 7%, 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)? O $1,425,066 O $1,450,066 O $975,066 O $525,066 Making the accept or reject decision Cold Goose Metal Works Inc.'s decision to accept or reject project Alpha is independent of its decisions on other projects. If the firm follows the NPV method, it should accept project Alpha

Explanation / Answer

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=325000/1.07+425000/1.07^2+475000/1.07^3+475000/1.07^4

=$1425066.50

NPV=Present value of inflows-Present value of outflows

=$1425066.50-$450,000

=$975066(Approx)

Hence since NPV is positive;the project should be accepted.

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