Question

Suppose Blue Hamster Manufacturing Inc. is evaluating a proposed capital budgeting project (project Beta) that will require an initial investment of $2,500,000. The project is expected to generate the following net cash flows: Cash Flow Year Year 1 $325,000 $500,000 Year 2 $475,000 Year 3 $500,000 4 Blue Hamster Manufacturing Inc.'s weighted average cost of capital is 10%, and project Beta has the same risk as the firm's average project. Based on the cash flows, what is project Beta's NPV? -$592,941 -$1,092,941 -$1,256,882 -$3,592,941 Making the accept or reject decision Blue Hamster Manufacturing Inc.'s decision to accept or reject project Beta is independent of its decisions on other projects. If the firm follows project Beta. the NPV method, it should Suppose your boss has asked you to analyze two mutually exclusive projects-project A and project B. Both projects require the same investment amount, and the sum of cash inflows of Project A is larger than the sum of cash inflows of project B. A coworker told you that you

Answer 1

The project NPV is computed as shown below:

= - $ 2,500,000 + $ 325,000 / 1.10¹ + $ 500,000 / 1.10² + $ 475,000 / 1.10³ + $ 500,000 / 1.10⁴

= - $ 1,092,941 Approximately

So the correct answer is option of - $ 1,092,941

Since the project's NPV is negative, it should reject project Beta.

The correct answer will be the option of

No, the NPV calculation will take into account not only the projects' cash inflows but also the timing of cash inflows and outflows. Consequently, project B could have a larger NPV than project A, even though project A has larger cash inflows.

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