The net present value (NPV) rule is considered one of the most common and prefer

Question

The net present value (NPV) rule is considered one of the most common and preferred criteria that generally lead to good investment decisions. Consider this case: Suppose Hungry Whale Electronics is evaluating a proposed capital budgeting project (project Beta) that will require an initial investment of $3,225,000. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $325,000 Year 2 $500,000 Year 3 $475,000 Year 4 $425,000 Hungry whale Electronics's weighted average cost of capital is 8%, and project Beta has the same risk as the firm's average project. Based on the cash flows, what is project Beta's NPV O-$1,805,947 $1,419,053 O-$2,167,136 O-$2,076,839 Making the accept or reject decision Hungry Whale Electronics's decision to accept or reject project Beta is independent of its decisions on other projects. If the firm follows the NPV method, it should project Beta

Explanation / Answer

NPV = -initial investment + Present value of cash flows

= -3225000 + 325000/(1+8%) + 500000/(1+8%)^2 + 475000/(1+8%)^3 + 425000/(1+8%)^4

= -1,805,947

since NPV is negative , it should reject project beta

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