NPV PROBLEM

NPV PROBLEM 150 150 Affordable Capstone Projects Written from Scratch

. The capital budgeting process is comprehensive and is based on certain assumptions, or models and benchmarks that a company follows.This process often begins with a project analysis. Generally, the first step in project analysis before using any evaluation method is to estimate the ________.

a. Revenues from all project

b. Company’s net income

c. Projects expected cashflow

2. Suppose Blue Hamster Manufacturing Inc, is evaluation 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 Cash Flow Year 1 \$325,000 Year 2 \$425,000 Year 3 \$450,000 Year 4 \$400,000

Blue Hamster Manufacturing Inc’s weighted average cost of the capital is 10%, 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)?

a. \$871,690

b. \$1,157,991

c. \$1,182,991

d. \$757,991

3. Blue Hamster Manufacturing Inc’s decision to accept or reject project Alpha is independent of its decisions on other projects. If the firms follows the NPV method, it should ______ project alpha

a. Accept

b. Reject

4. Which of the following statements best explains what it mean when a project has an NPV of \$0?

a. When a project has 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.

b. 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. Its Ok to accept the project, as long as the project’s profit is positive.

c. When a project has an NPV of \$0, the project is earning a rate of return equal to the project’s weighted average cost of capital. Its Ok to accept the project with an NPV of \$0, because the project is earning the required minimum rate of return.

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