Net present value

reject/accept

The pet present value (MPV) rule is considered one of the most common and preferred criteria that generally lead to good investment destions Consider this case: Suppose Green Caterpillar Garden Supplies Inc. 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: Year Year 1 Year 2 Cash Flow $375,000 $500,000 $450,000 $475,000 Year 3 Year 4 Green Caterpillar Garden Supplies Inc.'s cost of capital is 8%, and project Beta has the same risk as the firm's average project. Based on the cash flows, what is project Beta's NPV? 0 $854,157 $242,745 0.-$292,745 5742,745 Green Caterpilter Garden Supplies Inc.'s decision to accept or reject project Detais independent of its decisions on other projects. If the firm follows the NPV 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 investment amount, and the sum of cash inflows of Project A is larger than the sum of cash flows of projects. A coworker told you that you don't need to do any NPV analysis of the projects because you already know that project will have a larger Ny than project. Do you agree with your coworker's statement? No, the NPV calculation is based on percentage returns, so the size of a project's cash flows does not affect a project's NPV. Yes, project A will always have the largest NPV, because its cash inflows are greater than project'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 outflowes Consequently, project B could have a larger NPV than project A, even though project A has larger cash intlows