Question

Consider this case: Suppose Happy Dog Soap Company is evaluating a proposed capital budgeting project (project Alpha) that will require an initial investment of $550,000. 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 $450,000 $425,000 Happy Dog Soap Company'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)? $1,367,568 $817,568 $1,242,568 $940,203 Making the accept or reject decision Happy Dog Soap Company'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 so, 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. O 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.

Answer 1

NPV = PV of cash Inflows - PV of cash outflows

Year	CF	PVF @9%	Disc CF
0	$ -5,50,000.00	1.0000	$ -5,50,000.00
1	$ 3,25,000.00	0.9174	$ 2,98,165.14
2	$ 5,00,000.00	0.8417	$ 4,20,840.00
3	$ 4,50,000.00	0.7722	$ 3,47,482.57
4	$ 4,25,000.00	0.7084	$ 3,01,080.71
NPV			$ 8,17,568.41

Project can be selected as it has +vce NPV.

Project can be slected even if NPV is Zero. NPV zero means project getting the return which is equal to cost of capital

Option B is correct.