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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 Ox Truckmakers 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 Year 1 Year 2 Cash Flow $350,000 $450,000 $475,000 $400,000 Year 3 Year 4 Lumbering Ox Truckmakers's weighted average cost of capital is 8%, 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)? $880,959 $1,230,959 $380,959 $1,280,959 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 sez project Alpha Which of the follow reject accept When a ments best explains what it means when a project has an NPV of $0? Jis an NPV of $0, the project is earning a profit of $0. A firm should reject any project with an NPV of $0, because the project is not profitable 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 $0, because the project is earning the required minimum rate of retum. When a project has an NPV of $0, 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. a