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 8%. 0 2 3 4 190 240 Project A-1,150 Project B 1,150 650 395 250 330 340 690 What is Project A's NPV? Round your answer to the nearest cent. Do not round your intermediate calculations. show All Feedback What is Project B's NPV? Round your answer to the nearest cent. Do not round your intermediate calculations

Answer 1

We shall use excel to calculate the same:

Year	Project A	Project B
0	$ (1,150.00)	$ (1,150.00)
1	$       650.00	$       250.00
2	$       395.00	$       330.00
3	$       190.00	$       340.00
4	$       240.00	$       690.00
NPV	$       117.74	$       141.48

Also we can use discount factors to calculate the present values and sum them up to get NPV

Year	Project A	Project B	DF	PV A	PV B
0	$ (1,150.00)	$ (1,150.00)	1	$ (1,150.00)	$ (1,150.00)
1	$       650.00	$       250.00	0.925926	$       601.85	$       231.48
2	$       395.00	$       330.00	0.857339	$       338.65	$       282.92
3	$       190.00	$       340.00	0.793832	$       150.83	$       269.90
4	$       240.00	$       690.00	0.73503	$       176.41	$       507.17
NPV	$       117.74	$       141.48	NPV	$       117.74	$       141.48

The discount factors are calculated as:1/(1.08^n) where n is the year: Formula:(1/(1+r)^n). Here r is the WACC