Evaluating cash flows with the NPV method The net present value (NPV) rule is co

Question

Evaluating cash flows with the NPV method 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 Happy Dog Soap Company is evaluating a proposed capital budgeting project (project Alpha) that will require an initial investment of $500,000. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $350,000 Year 2 $425,000 Year 3 $500,000 Year 4 $450,000 Happy Dog Soap Company's weighted average cost of capital is 9%, 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 $1,060,438 O $1,016,253 O $1,333,698 $883,698 Making the accept or reject decision Happy Dog Soap Company'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.

Explanation / Answer

1

Accept the Project

2

IRR usiing EXCel IRR Funtion

3

Abswer is option 3 The Project wtih the greatest IRR

Period Cash Flow PV factor 9% present Value 0 -500000                        1.0000     -5,00,000.00 1 350000                        0.9174       3,21,100.92 2 425000                        0.8417       3,57,714.00 3 500000                        0.7722       3,86,091.74 4 450000                        0.7084       3,18,791.34 NPV       8,83,698.00

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