1. Net present value (NPV) 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 tumberino Ox Truckmakers is evaluating a proposed capital budgeting project (project Beta) that will require an initial investment of $2,225,000. The project is expected to generate the following net cash fows: Lumbering Ox Truckmakers's weighted average cost of capital is 10 Si, and project Beta has the same risk as the firm's average project. Based on the Cash flows, what is project Beta's NPV? $448,713$823,713$3,048,713$947,270 Moking the accept or reject decision Lumbering Ox Truckmakers's decision to accept or relect project Beta is independent of its decisions on other projects. If the firm follows the Npy method, it should project Beta. Suppose vour boss has asked you to analyze two mutually exduslve projects-prolect A and prolect B. Both projects reguire the same investment amounth and the sum of cash inflows of Project A is larger than the sum of cash inflows of project B, A coworker told you that you don' need to do an NpV analva's of the projects because you already know that prolect A will have a laroer Npy than project 6. Do you agree with your coworker') statement? Making the accept or reject decision Lumbering Ox Truckmakers's decision to accept or reject project Beta is independent of its decisions on other projects. If the firm follows the NFy method, it should project Beta. Suppose your boss has asked you to analyze two mutually exclusive projects-project A and project B. Both projects require the same irivestrnent amount, and the sum of cash inflows of Broject A is larger than the sum of cash inflows of project B. A coworker told you that you don't need to do an NPV analysis of the projects because you already know that project A wial haye a larger NpV than project B. Do you agree with your coworker's statement? Yes, project A will always have the largest NpV, because its cash inflows are oreater than project B's cash inflows. No, the NPy calculation will take into account not only the projects' cash inflows but also the timing of cash inflows and outhlows. Consequently, project B could have a larger NPV than project A even though project A has larger cash inflows. No, the NPV calculation is based on percentage feturns, so the size of a project's cash flows does not affect a project's NpN. 1. Net present value (NPV) 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 Lumbering 0x Truckmakers is evaluating a proposed capital budgeting project (project Beta) that will require an initial investment of $2,225,000. The project is expected to generate the following net cash flows: Making the accept or reject decision Lumbering Ox Truckmakers's decision to accept or reject project Beta is independent of its decisions on other projects. If the firm follo method, it should project Beta. Suppose your bos Id you to analyze two muthavily exclusive projects - project A and project B. Both projects require the same amount, and the h inflows of Project A is larger than the sum of cash inflows of project B. A coworker told you that you don NPV analysis of th because you already know that project A will have a larger NPV than project B. Do you agree with your co statement? Yes, project A will always have the largest NPV, because its cash inflows are greater than project B's cash inflows. No, the NPV calculation will take into account not only the projects' cash inflows but also the timing of cash inflows and outfi Consequently, project B could have a larger NPV than project A, even though project A has larger cash inflows. No, the NPV calculation is based on percentage retum5, so the size of a project's cash flows does not affect a project's NPV