The Basics of Capital Budgeting: NPV NPV The net present value (NPV) method estimates how much...
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The Basics of Capital Budgeting: NPV NPV The net present value (NPV) method estimates how much a potential project will contribute to [shareholders' wealth, and it is the best selection criterion. The larger the NPV, the more value the project adds; and added value means a higher stock price. In equation form, the NPV is defined as: N CF CA CFN NPV=CF+ + +...+ (1+r)" CF (1+r)* (1+r)* CF, is the expected cash flow at Time t, r is the project's risk-adjusted cost of capital, and N is its life, and cash outflows are treated as negative cash flows. The NPV calculation assumes that cash inflows can be reinvested at the project's risk-adjusted WACC . When the firm is considering independent projects, if the project's NPV exceeds zero the firm should accept the project. When the firm is considering mutually exclusive projects, the firm should accept the project with the highest positive NPV. Quantitative Problem: Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 8%. 0 1 2 3 Project A Project B -1,200 -1,200 690 310 260 310 290 245 410 760 What is Project A's NPV? Round your answer to the nearest cent. Do not round your intermediate calculations. What is Project B's NPV? Round your answer to the nearest cent. Do not round your intermediate calculations. If the projects were independent, which project(s) would be accepted? -Select- If the projects were mutually exclusive, which project(s) would be accepted? -Select- The Basics of Capital Budgeting: NPV NPV The net present value (NPV) method estimates how much a potential project will contribute to [shareholders' wealth, and it is the best selection criterion. The larger the NPV, the more value the project adds; and added value means a higher stock price. In equation form, the NPV is defined as: N CF CA CFN NPV=CF+ + +...+ (1+r)" CF (1+r)* (1+r)* CF, is the expected cash flow at Time t, r is the project's risk-adjusted cost of capital, and N is its life, and cash outflows are treated as negative cash flows. The NPV calculation assumes that cash inflows can be reinvested at the project's risk-adjusted WACC . When the firm is considering independent projects, if the project's NPV exceeds zero the firm should accept the project. When the firm is considering mutually exclusive projects, the firm should accept the project with the highest positive NPV. Quantitative Problem: Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 8%. 0 1 2 3 Project A Project B -1,200 -1,200 690 310 260 310 290 245 410 760 What is Project A's NPV? Round your answer to the nearest cent. Do not round your intermediate calculations. What is Project B's NPV? Round your answer to the nearest cent. Do not round your intermediate calculations. If the projects were independent, which project(s) would be accepted? -Select- If the projects were mutually exclusive, which project(s) would be accepted? -Select-
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To calculate the NPV for Project A and Project B we can use the formula NPV sumt0n CFt1rt Where CFt ... View the full answer
Related Book For
Management Accounting Information for Decision-Making and Strategy Execution
ISBN: 978-0137024971
6th Edition
Authors: Anthony A. Atkinson, Robert S. Kaplan, Ella Mae Matsumura, S. Mark Young
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