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 Cute Camel Woodcraft 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	$500,000
Year 3	$450,000
Year 4	$500,000

Cute Camel Woodcraft Companys weighted average cost of capital is 7%, and project Alpha has the same risk as the firms average project. Based on the cash flows, what is project Alphas net present value (NPV)?

$1,012,604

$1,462,604

$512,604

$1,164,495

Making the accept or reject decision

Cute Camel Woodcraft Companys 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.

Accept or Reject?