Bellinger Industries is considering two projects for inclusion in its capital bu
ID: 2760326 • 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 10%. 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?Explanation / Answer
NPV is the sum of present value of all cash flows. It calculated as follows:
Year
Cash flow A
Cash flow B
PV factor 10%
PV A
PV B
0
-910
-910
1.0000
-910.00
-910.00
1
690
290
0.9091
627.27
263.64
2
305
240
0.8264
252.07
198.35
3
270
420
0.7513
202.85
315.55
4
320
770
0.6830
218.56
525.92
NPV
$390.76
$393.46
NPV of project A = 390.76
NPV of project B =393.46.
If the projects are independent, we can choose all the projects with positive NPV, since both the projects have positive NPVs, both should be selected.
If the projects are mutually exclusive, only one project with the highest NPV can be chosen. Project B has the highest NPV, therefore, project B should be selected.
Year
Cash flow A
Cash flow B
PV factor 10%
PV A
PV B
0
-910
-910
1.0000
-910.00
-910.00
1
690
290
0.9091
627.27
263.64
2
305
240
0.8264
252.07
198.35
3
270
420
0.7513
202.85
315.55
4
320
770
0.6830
218.56
525.92
NPV
$390.76
$393.46
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