The net present value (NPV) rule is considered one of the most common and prefer

Question

The net present value (NPV) rule is considered one of the most common and preferred criteria that generally lead to good investment decisions. Consider this case: Suppose Pheasant Pharmaceuticals 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 $500,000 Year 4 $475,000 Pheasant Pharmaceuticals's weighted average cost of capital is 10%, 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 -$1,107,762 O -$1,329,314 O-$1,273,926 O $1,392,238 Making the accept or reject decision Pheasant Pharmaceuticals'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 of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=375000/1.1+425000/1.1^2+500,000/1.1^3+475000/1.1^4

=$1392237.552

NPV=Present value of inflows-Present value of outflows

=$1392237.552-$2,500,000

=($1,107,762)(Approx)(Negative).

Hence since NPV is negative;the project should not be accepted.

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