Bellinger Industries is considering two projects for inclusion in its capital bu
ID: 2791883 • 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 -950 670 345 260 310
Project B -950 270 280 410 760
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
Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)
A:
Present value of inflows=670/1.08+345/1.08^2+260/1.08^3+310/1.08^4
=$1350.41(Approx)
NPV=Present value of inflows-Present value of outflows
=(1350.41-950)=$400.41(Approx)
B:
Present value of inflows=270/1.08+280/1.08^2+410/1.08^3+760/1.08^4
=$1374.15
NPV =$1374.15-$950
=$424.15
Hence If the projects were independent,both must be accepted having positive NPV.
If the projects were mutually exclusive,B having higher NPV must be selected.
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