Question

Suppose Celestial Crane Cosmetics is evaluating a proposed capital budgeting project (project Alpha) that will require an initial investment of $450,000. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 Year 2 Year 3 Year 4 $325,000 $500,000 $475,000 $400,000 Celestial Crane Cosmetics's weighted average cost of capital is 9%, 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)? $919,162 $1,394,162 $1,319,162 $1,057,036 Making the accept or reject decision Celestial Crane Cosmetics's decision to accept or reject project Alpha is independent of its decisions on other projects. If the firm follows the NPV Celestial Crane Cosmetics'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 $0, 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 $0, because the project is earning the required minimum rate of return. When a project has an NPV of $0, 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 $0, 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

D7 - fx =SUM(D2:06) F G H I J K L M 2 1 year Cash flows pv@9% Present value o $ (450,000) 1.0000 $ (450,000) 3 1 $ 325,000 0.9174 $ 298,165 4 2 $ 500,000 0.8417 $ 420,840 5 3 $ 475,000 0.7722 $ 366,787 4 $ 400,000 0.7084 $ 283,370 NPV $ 919,162 | Accept Project Alpha When a project has an NPV of $0, the project is earning a rate of return equal to the projects weighted average cost of capital. It's OK to accept a project with NPV of $0, because the Project is earning the required minimum rate of return 12 13

fx =SUM(D2:06) pv@9% D7 A 1 year 20 31 42 5 3 Cash flows -450000 325000 500000 475000 400000 =C2/1.09 =C3/1.09 =C4/1.09 =C5/1.09 NPV Present value =B2*C2 =B3*C3 =B4*C4 =B5*C5 =B6*C6 -SUM(D2:06) A 7 Accept Project Alpha