The capital budgeting process is comprehensive and is based on certain assumptions, models, and benchmarks. This process often begins with a project analysis. Generally, the first step in a capital budgeting project analysis-which occurs before any evaluation method is appliedinvolves estimating the 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 cases Suppose Cold Goose Metal Works Inc. is evaluating a proposed capital budgeting project (project Alpha) that will require an initial investment of $550,000. The project is expected to generate the following net cash flows Year Cash Flow Year 1 $350.000 Your 2 425,000 Year 3 475,000 Year 4 425.000 Cold Goose Metal Worla Inc.'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 flow, what is project Alpha's net present value (NPV)? (Note: Do not round your intermediate calculations.) 5796.683 5: 271.683 5916.18 & Cold Goose Metal Works Inc.'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 net present value (NPV)? (Note: Do not round your intermediate calculations.) O $796,683 O $1,271,683 O $916,185 0 $1,346,683 Making the accept or reject decision Cold Goose Metal Works Inc.'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 Suppose your boss has asked you to analyze twa 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 inflows of project B. A coworker told you that you don't need to do an NPV analysis of the projects because you already know that project A will have a larger NPV than project B. Do you agree with your coworker's statement Yes, project A will always have the largest NPV, because its cash inflows are greater than project e'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 outflows. Consequently, project 8 could have a larger NPV than project A, even though project A has larger cash inflows. No, the NPV calculation is based on percentage returns, so the size of a project's cash flows does not affect a project's NPW. Grade It Now Save & Continue Continue without saving