Bellinger Industries is considering two projects for inclusion in its capital bu
ID: 2724525 • Letter: B
Question
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 -1,200 660 310 240 290
Project B -1,200 260 245 390 740
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. $_____
Explanation / Answer
Net Present Value = Total present Value of cash inflows – Total Present value of cash outflows
Calculation of net Present Value of project A
Year
Cash inflow ($)
Present Value factor at 10%
Present Value of Cash inflows ($)
1
660
0.909
597.96
2
310
0.826
256.06
3
240
0.751
180.24
4
290
0.683
198.07
Total Present Value of Cash inflows
1,232.33
Total Present Value of Cash Outflow ie., initial investment
1,200.00
Net present Value
32.33
Net Present Value = Total present Value of cash inflows – Total Present value of cash outflows
Calculation of net Present Value of project B
Year
Cash inflow ($)
Present Value factor at 10%
Present Value of Cash inflows ($)
1
260
0.909
236.34
2
245
0.826
202.37
3
390
0.751
292.89
4
740
0.683
505.42
Total Present Value of Cash inflows
1237.02
Total Present Value of Cash Outflow ie., initial investment
1,200.00
Net present Value
37.02
Net present Value of Project A
$ 32
Net present Value of Project B
$ 37
Note: The values are rounded off.
As both the projects have a positive value both the projects could be recommended.
Year
Cash inflow ($)
Present Value factor at 10%
Present Value of Cash inflows ($)
1
660
0.909
597.96
2
310
0.826
256.06
3
240
0.751
180.24
4
290
0.683
198.07
Total Present Value of Cash inflows
1,232.33
Total Present Value of Cash Outflow ie., initial investment
1,200.00
Net present Value
32.33
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