Question

# The net present value (NPV) method estimates how much a potential project will contribute to ____...

The net present value (NPV) method estimates how much a potential project will contribute to ____ and it is the best selection criterion. The _____ the NPV, the more value the project adds; and added value means a ____ stock price.

CFt is the expected cash flow at Time t, r is the project's risk-adjusted cost of capital, and N is its life, and cash outflows are treated as negative cash flows. The NPV calculation assumes that cash inflows can be reinvested at the project's risk-adjusted _____. When the firm is considering independent projects, if the project's NPV exceeds zero the firm should _____ the project. When the firm is considering mutually exclusive projects, the firm should accept the project with the _____ NPV.

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 9%.

 0 1 2 3 4 Project A -1,190 700 315 270 320 Project B -1,190 300 250 420 770

What is Project A's NPV? Do not round intermediate calculations. Round your answer to the nearest cent.

\$

What is Project B's NPV? Do not round intermediate calculations. Round your answer to the nearest cent.

\$

If the projects were independent, which project(s) would be accepted?

______

If the projects were mutually exclusive, which project(s) would be accepted?

______

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