Suppose Lumbering Ox Truckmakers is evaluating a proposed capital budgeting proj

Question

Suppose Lumbering Ox Truckmakers 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: Year Cash Flow Year 1 $375,000 Year 2 $475,000 Year 3 $475,000 Year 4 $475,000 Lumbering Ox Truckmakers's weighted average cost of capital is 7%, and project Alpha has the same risk as the firm's average project. Based on the cash flows, what is project Alpha's net present value (NPV)? O $1,338,560 O $1,115,467 O $715,467 O $1,282,787 Making the accept or reject decision Lumbering Ox Truckmakers'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. reject accept

Explanation / Answer

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=375000/1.07+475000/1.07^2+475000/1.07^3+475000/1.07^4

=$1,515,467.403

NPV=Present value of inflows-Present value of outflows

=$1,515,467.403-$400,000

=$1,115,467(Approx)

Hence since NPV os positive;the project should be accepted.

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