Question

Suppose Green Caterpillar Garden Supplies 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 Year 1 Year 2 Year 3 Year 4 Cash Flow $325,000 $400,000 $475,000 $475,000 Green Caterpillar Garden Supplies Inc.'s weighted average cost of capital is 9%, 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)? $888,126 $1,363,126 $1,338,126 O $1,021,345 Making the accept or reject decision Green Caterpillar Garden Supplies 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 project Alpha.

Answer 1

NPV = PV of Cash Inflows - PV of Cash Outflows

Year	CF	PVF @9%	Disc CF
0	$ -4,50,000.00	1.0000	$ -4,50,000.00
1	$ 3,25,000.00	0.9174	$ 2,98,165.14
2	$ 4,00,000.00	0.8417	$ 3,36,672.00
3	$ 4,75,000.00	0.7722	$ 3,66,787.15
4	$ 4,75,000.00	0.7084	$ 3,36,501.98
NPV			$ 8,88,126.26

Option A is correct.

Project can be accepted as it has +ve NPV.