Question

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Suppose Fuzzy Button Clothing Company is evaluating a proposed capital budgeting project (project Beta) that will require an initial investment of $2,750,000. The project is expected to generate the following net cash flows: Year Year 1 Year 2 Year 3 Year 4 Cash Flow $275,000 $400,000 $475,000 $450,000 Fuzzy Button Clothing Company's weighted average cost of capital is 8%, 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 -$1,444,601 -$1,044,601 O -$969,601 0 $1,305,399 Making the accept or reject decision Fuzzy Button Clothing 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. accept reject

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Answer 1

Project Beta
Discount rate	0.08
Year	0	1	2	3	4
Cash flow stream	-2750000	275000	400000	475000	450000
Discounting factor	1	1.08	1.1664	1.259712	1.360489
Discounted cash flows project	-2750000	254629.6	342935.5	377070.3	330763.43
NPV = Sum of discounted cash flows
NPV Project Beta =	-1444601
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
Reject project as NPV is negative