Suppose Cold Goose Metal Works Inc. is evaluating a proposed capital budgeting p
ID: 2762255 • Letter: S
Question
Suppose Cold Goose Metal Works Inc. is evaluating a proposed capital budgeting project (project Alpha) that will require an initial investment of $400,000. The project is expected to generate the following net cash flows: Cold Goose Metal Works Inc.'s weighted average cost of capital is 9%, and project Alpha has the same nsk as the firm's average project. Based on the cash flows, what is project Alpha's net present value (NPV)? $1,017,743 $1,784,994 $884,994 $484,994 Cold Goose Metal Works 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 $07 When a project has an NPV of $0, the project is earning a rate of return equal to the project's weighted average cost of capital. It's OK to accept a project with an NPV of $0, because the project is earning the required minimum rate of return. 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.Explanation / Answer
Cold goose Metal Works NPV calculation Year Cash Flow PV factor @9% PV of Cash Flows Year 0 (400,000.0) 1.00 (400,000) Year 1 325,000.0 0.917 298,165 Year 2 400,000.0 0.842 336,672 Year 3 475,000.0 0.772 366,787 Year 4 400,000.0 0.708 283,370 884,994.4 So NPV is $ 884,994.0 So by NPV criterion, the firm should __ACCEPT __ project Alpha. A Project is accepted if the NPV >0. So the second statement that : "when a project has NPV of $0 , the project is making a profit of 0.A firm should reject any project with an NPV =0 because the project is not profitable."is TRUE.
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