Suppose Hungry Whale Electronics is evaluating a proposed capital budgeting project (project Alpha) that will require...
Suppose Hungry Whale Electronics 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 | $375,000 |
| Year 2 | $450,000 |
| Year 3 | $450,000 |
| Year 4 | $450,000 |
Hungry Whale Electronics’s weighted average cost of capital is 8%, 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)?
$1,421,013
$621,013
$1,471,013
$1,021,013
Hungry Whale Electronics’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 accept or reject project Alpha.
Homework Answers
Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)
=375000/1.08+450,000/1.08^2+450,000/1.08^3+450,000/1.08^4
=1421012.63
NPV=Present value of inflows-Present value of outflows
=1421012.63-400,000
=$1021013(Approx)
Hence since NPV is positive;project must be accepted.
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