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 8%.

	0		1		2		3		4
Project A	-980		620		310		280		330
Project B	-980		220		245		430		780

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.

$  

Answer 1

The NPV is computed as shown below:

= Initial investment + Present value of future cash flows

Present value is computed as follows:

= Future value / (1 + r)ⁿ

The NPV of project A is computed as follows:

= - $ 980 + $ 620 / 1.08 + $ 310 / 1.08² + $ 280 / 1.08³ + $ 330 / 1.08⁴

= $ 324.68 Approximately

The NPV of project B is computed as follows:

= - $ 980 + $ 220 / 1.08 + $ 245 / 1.08² + $ 430 / 1.08³ + $ 780 / 1.08⁴

= $ 348.42 Approximately

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