Question

1. Net present value (NPV) Aa Aa 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 Pheasant Pharmaceuticals is evaluating a proposed capital budgeting project (project Beta) that will require an initial investment of $3,225,000. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $375,000 Year 2 $425,000 Year 3 $500,000 Year 4 $400,000 Pheasant Pharmaceuticals'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 -$1,822,481 O-$1,447,481 O $1,402,519 O -$1,397,481

Answer 1

Project Beta’s Net Present Value (NPV)

Year	Annual Cash Flow	Present Value factor at 8%	Present Value of Cash Flow
1	$3,75,000	0.92593	$3,47,222
2	$4,25,000	0.85734	$3,64,369
3	$5,00,000	0.79383	$3,96,916
4	$4,00,000	0.73503	$2,94,012
TOTAL			$14,02,519

Net Present Value (NPV) = Present Value of annual cash inflows – Initial Investment

= $14,02,519 - $32,25,000

= -$18,22,481

“Project Beta’s Net Present Value (NPV) = -$18,22,481”  

DECISION

If the firm follows NPV method, it should “REJECT” Project Beta (As per NPV Method, The Project is Acceptable only if the NPV is Positive)

“YES. The Project-A will always have the largest NPV, because its cash inflows are larger than Project-B’s Cash Inflows“