Question

Suppose Pheasant Pharmaceuticals is evaluating a proposed capital budgeting project (project Beta) that will require an initial investment of $2,225,000. The project is expected to generate the following net cash flows: Year Year 1 Year 2 Year 3 Year 4 Cash Flow $325,000 $450,000 $500,000 $500,000 Pheasant Pharmaceuticals's weighted average cost of capital is 9%, and project Beta has the same risk as the firm's average project. Based on the cash flows, what is project Beta's NPV? $1,417,225 O -$807,775 O -$482,775 -$928,941 Making the accept or reject decision Pheasant Pharmaceuticals'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.

Answer 1

NPV = -initial investment + PV of future cash flows

Present value = Future value/(1+i)^n

i = interest rate per period

n= number of periods

NPV

= -2225000 + 325000/1.09 + 450000/1.09^2 + 500000/1.09^3 + 500000/1.09^4

= -807775

Reject the project, since NPV is negative