The net present value (NPV) rule is considered one of the most common and prefer
ID: 2720343 • Letter: T
Question
The net present value (NPV) rule is considered one of the most common and preferred criteria that generally lead to good investment decisions. Suppose Blue Hamster Manufacturing Inc. is evaluating a proposed capital budgeting project (project Alpha) that will require an initial investment of $500,000. The project is expected to generate the following net cash flows: Blue Hamster Manufacturing Inc.'s weighted average cost of capital is 9%, and project Alpha has the same risk as the firm's average project. Based on the cash flows, what is project Alpha's net present value (NPV)? Blue Hamster Manufacturing Inc.'s decision to accept or reject project Alpha is independent of its decisions on other projects. If the firm follows the NPV method, it should project Alpha. Which of the following statements best explains what it means when a project has an NPV of $0?Explanation / Answer
Calculation of NPV
So $ 836,076 is closest to the NPV as calculated above. That is the correct option.
Yes, the project should be accepted as it gives a positive NPV, which means that it is going to help in the objective of maximizing shareholder value.
When a project has an NPV of $ 0, the project is earning a profit of $ 0. A firm should reject any project with an NPV of $ 0, because the project is not profitable.
Period PV factor at 9% Cash flows Present Value of cash flows 0 1 (500,000) (500,000) 1 0.917 275,000 252,175 2 0.842 475,000 399,950 3 0.772 450,000 347,400 4 0.708 475,000 336,300 NPV 835,825Related Questions
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