Question

Suppose Pheasant Pharmaceuticals is evaluating a proposed capital budgeting project (project Alpha) that will require an initial investment of $400,000. The project is expected to generate the following net cash flows:

Year	Cash Flow
Year 1	$350,000
Year 2	$475,000
Year 3	$475,000
Year 4	$475,000

Pheasant Pharmaceuticals'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)? $592,050 $1,467,050 $1,140,858 $992,050 Making the accept or reject decision Pheasant Pharmaceuticals'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. Which of the following statements best explains what it means when a project has an NPV of $0? When a project has an NPV of so, the project is earning a profit of $0. A firm should reject any project with an NPV of $0, because the project is not profitable. When a project has an NPV of so, the project is earning a rate of return equal to the project's weighted average cost of capital. It's OK to accept a project with an NPV of so, because the project is earning the required minimum rate of return. When a project has an NPV of so, the project is earning a rate of return less than the project's weighted average cost of capital. It's OK to accept the project, as long as the project's profit is positive.

Answer 1

Initial Investment = 400000 WACC = 10% NPV 475000 -400000 350000 350000 + 475000 475000 (1-1012 +425000 + 55-034 475000 013 ? 1.10 (110) = 318 181.82 + 392561.98 + 356874.53 + 32443 1. 39 - 400000 = 992049.72 =$992050 (option D) Since NPV is +ve , Pheasant Pharmaceuticals should (Positive) accept the project. When NPuzo, firm rate of retum is equal to WACC. In such scenario, we can accept the project because WACC is the minimum rate of return that has to be earned for the shareholders. Coption B)