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.

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

A:

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=680/1.07+335/1.07^2+240/1.07^3+290/1.07^4

=1345.27

NPV=Present value of inflows-Present value of outflows

=1345.27-1130

=$215.27(Approx)

B:

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=280/1.07+270/1.07^2+390/1.07^3+740/1.07^4

=1380.41

NPV=Present value of inflows-Present value of outflows

=1380.41-1130

=$250.41(Approx)

Hence If the projects were independent, both projects A and B must be selected having positive NPV.

If the projects were mutually exclusive,project B must only be selected having higher NPV.