2.

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 the case of celestial Crane Cosmetics: Suppone Celestial Crane Cosmetics is evaluating a proposed capital budgeting project (project Alpha) that will require an initial investment of $600,000. The project is expected to generate the following net cash flows: Year Year 1 Year 2 Cash Flow $300,000 $475,000 $425,000 $475,000 Year 3 Year The company's weighted average cost of capital is 10%, and project Alpha has the same risk as the firm's average project. Based on the cash flows, Year 2 WWW. $475,000 $425,000 $475,000 Year 3 Year 4 The company's weighted average cost of capital is 10%, 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 $815,383 O $109,029 O $709,029 $1,009,029 Making the accept or reject decision Celestial Crane Cosmetics's decision to accept or reject project Alpha is independent of its decisions on other projects. If the firm follows the NPV 0 x Ch 12: Assignment - Capital Budgeting: Decision Criteria $1,009,029 Making the accept or reject decision A-Z Celestial Crane Cosmetics'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 Which of the follo, rejectments best explains what it means when a project has an NPV of $o? accept When a as an NPV of so, the project is earning a rate of return less than the project's weighted average cost of capital. It's OK to accept the project, as long as the project's profit is positive. O when a project has an NPV of so, the project is earning a rate of return equal to the project's weighted average cost of capital. It's OK to accept a project with an NPV of 50, because the project is earning the required minimum rate of return When a project has an NPV of so, the project is earning a profit of $0. A firm should reject any project with an NPV of so, because the project is not profitable 3. Cash flow patterns and the modified rate of return calculation Criteria a Searchtrusco Tosty Tuna Corporation is analyzing a project with the following cash flows: Year Cash Flow 0 -$1,653,000 $375,000 1 2 $450,000 3 $540,000 $360,000 4 This project has desh flows. is 7.00%. What is this project's modified internal rate of return (MIRR). normal Tasty Tuna Corpo nonnormal 07.000 Tasty Tuna Corporation's WACC is 7.00%. What is this project's modified internal rate of return (MIRR). O 7.00% A-Z O 3.7190 0 7.56% O 1.7196 asty Tuna Corporation's managers select projects based only on the MIRR criterion. Should Tasty Tuna Corporation's managers accept the dependent project? O Yes