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	-1,100		630		380		270		320
Project B	-1,100		230		315		420		770

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.

$

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

-Select-NeitherProject AProject BBoth projects A and BCorrect 1 of Item 3

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

-Select-Neither Project AProject BBoth projects A and B

Answer 1

Project A

Net present value is solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$1,100. It is entered with a negative sign since it is a cash outflow.
• Cash flow for all the years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow, press the NPV button and enter the weighted average cost of capital of 8%.
• Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows at 8% weighted average cost of capital is $258.67.

Project B

Net present value is solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$1,100. It is entered with a negative sign since it is a cash outflow.
• Cash flow for all the years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow, press the NPV button and enter the weighted average cost of capital of 8%.
• Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows at 8% weighted average cost of capital is $282.41.

If the projects were independent, then both projects can be accepted since they have a positive net present value.

If the projects were mutually exclusive, project B is accepted since it has the highest net present value.

In case of any query, kindly comment on the solution.