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 7%.

	0		1		2		3		4
Project A	-1,130		680		335		240		290
Project B	-1,130		280		270		390		740 What is Project A's NPV? Round your answer to the nearest cent. Do not round your intermediate calculations. What is Project B's NPV? Round your answer to the nearest cent. Do not round your intermediate calculations.

Answer 1

NPV = Total Present value of Cash inflows - Initial investment

In case of unequal cash flows, their present value is computed as -

Present value of a cash flow = Cash flow x PVIF (rate, year)

where, PVIF = Present value interest factor of $1 = 1 / (1 + r)ⁿr being the cost of capital or discount rate and n being the year for which it is calculated

for example PVIF @ 10% for year 1 = 1 / (1 + 0.1)¹ = 0.90909090909

Project A

NPV

Year	Cash Flows	PVIF @7%	Present value
0	(-)1130	1	(-)1130
1	680	0.93457943925	635.51
2	335	0.87343872827	292.60
3	240	0.81629787688	195.92
4	290	0.76289521203	221.24
		NPV	215.27

Project B

NPV

Year	Cash Flows	PVIF @7%	Present value
0	(-)1130	1	(-)1130
1	280	0.93457943925	261.68
2	240	0.87343872827	209.63
3	390	0.81629787688	318.36
4	740	0.76289521203	564.54
		NPV	224.21

Let me know in case of any queries.