Question

1. Net present value (NPV) Evaluating cash flows with the NPV method 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 Cute Camel Woodcraft Company is evaluating a proposed capital budgeting project (project Alpha) that will require an initial investment of $600,000. The project is expected to generate the following net cash flows: Cash Flow Year Year 1 $300,000 $500,000 $425,000 $475,000 Year 2 Year 3 Year 4 Cute Camel Woodcraft Company's weighted average cost of capital is 10%, 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)? $839,145 $729,691 $1,029,691 $1,329,691 Making the accept or reject decision Cute Camel Woodcraft Company'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

The net present value is computed as shown below:

= - $ 600,000 + $ 300,000 / 1.10 + $ 500,000 / 1.10² + $ 425,000 / 1.10³ + $ 475,000 / 1.10⁴

= $ 729,691 Approximately

So the correct answer is option of $ 729,691

Since the project's NPV is positive, hence the firm shall accept the project

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