Question

Net present value (NPV)

Evaluating cash flows with the NPV method

The net present value (NPV) rule is considered one of the most common and preferred criteria that generally lead to good investment decisions.

Consider this case:

Suppose Cute Camel Woodcraft Company is evaluating a proposed capital budgeting project (project Beta) that will require an initial investment of $3,225,000. The project is expected to generate the following net cash flows:

Year	Cash Flow
Year 1	$300,000
Year 2	$450,000
Year 3	$475,000
Year 4	$400,000

1. Cute Camel Woodcraft Company’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?

A. -$1,470,857

B. -$2,305,028

C. $1,304,143

D. -$1,920,857

Making the accept or reject decision

2. Cute Camel Woodcraft Company’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.

A. reject

B. accept

Answer 1