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:

Widget Corp. 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:

Widget Corp.$\text{'}$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 NPV$?$

$$839,720$

$$339,720$

$$1,164,720$

$$965,678$

Making the accept or reject decision

Widget Corp.$\text{'}$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.