Question

Quantitative Problem: Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 9%.

	0		1		2		3		4
Project A	-1,030		640		340		260		310
Project B	-1,030		240		275		410		760

What is the NPV of Project A and of Project B?

Answer 1

A:

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

=640/1.09+340/1.09^2+260/1.09^3+310/1.09^4

=1293.71

NPV=Present value of inflows-Present value of outflows

=1293.71-$1030

=$263.71(Approx).

B:

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

=240/1.09+275/1.09^2+410/1.09^3+760/1.09^4

=1306.64

NPV=Present value of inflows-Present value of outflows

=1306.64-1030

=$276.64(Approx).