Attempts: Average: 2 1. Net present value (NPV) AaAa Evaluating cash flows with

Question

Attempts: Average: 2 1. Net present value (NPV) AaAa Evaluating cash flows with the NPV method The net present value (NPV) rwe is considered one of the most common and preferred criteria that generally lead to good investment decisions Consider this case: Suppase Cute Camel Woadcraft Company 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 Yeari $300,000 Year 2 $475,000 Year 3 $5,000 Year4 $475,000 Cute Camel Woodcraft Company's weighted average cost of capital is 7%, and project Beta has the same nsk as the firm's average project. Based on the cash flows, what is project Beta's NPV? O $1,424,966 -$3,575,034 -$1,075,034 -$775,034 Making the accept or reject decision Cute Camel Woodecraft Company'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

NPV = Present value of all the future cash flows at a discount rate of 7%

NPV = - 2,500,000 + 300,000/(1.07) + 475,000/(1.07)^2 + 450,000/(1.07)^3 + 475,000/(1.07)^4

NPV = -$1,075,034

If the firm follows the NPV method, it should Reject project Bets since the NPV is negative.

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