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 8%.

	0		1		2		3		4
Project A	-1,190		680		350		250		300
Project B	-1,190		280		285		400		750

What is Project A's NPV? Round your answer to the nearest cent. Do not round intermediate calculations.

$

What is Project B's NPV? Round your answer to the nearest cent. Do not round intermediate calculations.

$

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

-Select-NeitherProject AProject BBoth projects A and BCorrect 1 of Item 3

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

-Select-Neither       Project AProject BBoth projects A and B

Answer 1

Based on the given data, pls find below steps, workings and answers:

Project A NPV is $ 158.67 and Project B NPV is $ 182.41

If the Projects are independent projects, both these projects can be accepted as both have positive NPV;

If the Projects are mutually exclusive projects, then Project B is recommended to accept as the Project B NPV is higher than Project A.

YEAR 2 3 0 -1,190.00 -1,190.00 1 680.00 4 300.00 Project A Project B 350.00 285.00 250.00 400.00 280.00 750.00 Discounting Factor 8.0% 0 1 2 3 4 YEAR Discounting Factor 1.0000 0.9259 0.8573 0.7938 0.7350 Discounted Cash Flow Project A Project B 300.07 -1,190.00 -1,190.00 629.63 259.26 198.46 317.53 220.51 551.27 NPV 158.67 182.41 244.34

Computation of Net Present Value (NPV) based on the Discounted Cash flows; The Discounting factor is computed based on the formula: For year 0, the discounting factor is 1; For Year 1, it is computed as = Year 0 factor /(1+discounting factor%) ; Year 2 = Year 1 factor/(1+discounting factor %) and so on;

Next, the cashflows need to be multiplied with the respective years' discounting factor, to arrive at the discounting cash flows;

The total of all the discounted cash flows is equal to its respective Project NPV of the Cash Flows;