Question

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.

CF_t 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?

______

Answer 1