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 is 9%. 0 1 2 300 Project A Project B -1,070 -1,070 630 230 365 300 250 400 750 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? Neither If the projects were mutually exclusive, which project(s) would be accepted? Project A

If the projects were independent, which project(s) would be accepted?

a) Neither

b) Project A

c) Project B

d) Project A and B

If the projects were mutually exclusive, which project(s) would be accepted?

a)Neither

b) Project A

c) Project B

d) Project A and B

Answer 1

Project A

Net present value can be solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$1,070. Indicate the initial cash flow by a negative sign since it is a cash outflow.  
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the weighted average cost of capital of 9%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.  

Net present value at 9% weighted average cost of capital is $220.77.

Project B

Net present value can be solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$1,070. Indicate the initial cash flow by a negative sign since it is a cash outflow.  
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the weighted average cost of capital of 9%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.  

Net present value at 9% weighted average cost of capital is $233.71.

If the projects are independent, both the projects must be accepted since they generate a positive net present value.

If the projects are mutually exclusive, Project B must be accepted since it generates the largest net present value.

In case of any query, kindly comment on the solution.