Question

Quantitative Problem: Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects after tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC 7. Project A -910 620 335 270 320 Project B -910 220 270 420 770 What is Project A's NPV? Do not round intermediate calculations. Round your answer to the nearest cent. What is Project B's NPV? Do not round intermediate calculations. Round your answer to the nearest cent. If the projects were independent, which project(s) would be accepted? -Select- If the projects were mutually exclusive, which project(s) would be accepted? Select-

Answer 1

NPV = Cash outflows - (Cash Inflow/(1+wacc)^n)

Project (A)= $(910)+ $620/(1+0.07)^1+$335/(1+0.07)^2+$270/(1+0.07)^3+$320/(1+0.07)

NPV(A)= $(910)+$620/(1.07)^1+$335/(1.07)^2+$270/(1.07)^3+$320/(1.07)^4

NPV(A) =$ (910)+ $579.44+$292.60+$220.40+$244.13

NPV(A)= $(910)+$1,336.57=$426.57

PROJECT B NPV CALCULATION:

NPV(B)=

$(910)+$220/(1.07)^1+$270/(1.07)^2+$420/(1.07)^3+$770/(1.07)^4

NPV(B)=$ (910)+$205.61+$235.82+$342.85+$587.43

NPV(B)=$(910)+$1,371.71=$461.719

NPV to Project A is $426.57

NPV to Project B is $461.719

INDEPENDENT CASE:

Project will be accepted if NPV is greater than zero

here both the projects have positive value hence both the projects have to be accepted.

IN MUTUALLY EXCLUSIVE CASE:

NPV of higher project value will be selected

Project (B) has $461.719 which is higher than NPV of Project (A)