Question

Suppose Hungry Whale Electronics is evaluating a proposed capital budgeting project (project Beta) that will require an initial investment of $2,225,000. The project is expected to generate the following net cash flows: Year Year 1 Year 2 Year 3 Cash Flow $325,000 $400,000 $400,000 $400,000 Year 4 Hungry Whale Electronics's weighted average cost of capital is 9%, and project Beta has the same risk as the firm's average project. Based on the cash flows, what is project Beta's NPV? O -$597,919 -$1,147,607 -$3,222,919 -$997,919 Making the accept or reject decision Hungry Whale Electronics's decision to accept or reject project Beta is independent of its decisions on other projects. If the firm follows the NPV method, it should project Beta. accent

Answer 1

A C Cash Flow Year 2 Year 0 3 Year 1 (2,225,000) 325,000 4 Year 2 400,000 5 Year 3 6 Year 4 400,000 400,000 7 8 Rate 9% 9 NPV (997,919) Option 4 10

A В C 1 Cash Flow Year 2 Year 0 -2225000 3 Year 1 325000 4 Year 2 5 Year 3 6 Year 4 400000 400000 400000 7 8 Rate 0.09 9 NPV =NPV(B8,B3:B6)+B2 Option 4

Given the NPV is negative, negative NPV would imply the project would erode firm value. Hence REJECT the project Beta.