Company X is evaluating a proposed capital budgeting project that will require a

Question

Company X is evaluating a proposed capital budgeting project that will require an initial investment of $176,000. The project is expected to generate cash flows of: Year 1- $46,000, Year 2- $51,900, Year 3- $49,200, Year 4- $48,900. Question one-The desired rate of return is 10%. What is the net present value of the project? Question two- If company x has enough capital to fund the project and the project is not competing with funding with other projects, should Company x accept or reject the project?

Explanation / Answer

NPV=-176000+46000/1.1+51900/1.1^2+49200/1.1^3+48900/1.1^4 NPV=-20925.21 NPV is negative-> reject this project Even have the firm has enough capital, negative NPV means that the firm can get more benefit by investing this amount of money in other alternatives. It also depends on the required return you need, if it is less than 4.8% (IRR of this project), you might want to invest in this project, otherwise, don't

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