The Basics of Capital Budgeting: Evaluating Cash Flows: NPV The net present value (NPV) method estimates how much a potential project will contribute to -Select- ✓, and it is the best selection criterion. The-Select-the NPV, the more value the project adds; and added value means a [-Select- stock price. In equation form, the NPV is defined as: CF₁ CFN CF₂ CF₁ NPV = CFO + + 2 N (1+r) ¹ (1+x)² (1+r)^ ' (1+x) ' CFt is the expected net cash flow at Time t, r is the project's risk-adjusted cost of capital, 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 -Select- . When the firm is considering independent projects, if the project's NPV exceeds zero the firm should -Select-the project. When the firm is considering mutually exclusive projects, the firm should accept the project with the -Select- ✓ NPV. Project A Project B 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 10%. 0 1 3 4 -1,070 -1,070 What is Project A's NPV? Do not round intermediate calculations. Round your answer to the nearest cent. $ What is Project B's NPV? Do not round intermediate calculations. Round your answer to the nearest cent. $ 2 680 280 -Select- 300 235 + ... + 280 430 330 780 If the projects were independent, which project(s) would be accepted? would be accepted. =t=0

Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter12: Capital Investment Analysis

Section: Chapter Questions

Problem 1CMA

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Question

The net present value (NPV) method estimates how much a potential project will contribute to Business ethics/Shareholders Wealth/Employee Benefits, and it is the best selection criterion. The Smaller/Larger the NPV, the more value the project adds; and added value means a Higher/Larger stock price. In equation form, the NPV is defined as:

CF_t is the expected net cash flow at Time t, r is the project's risk-adjusted cost of capital, 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 RD/RS/WACC. When the firm is considering independent projects, if the project's NPV exceeds zero the firm should Accept/Reject the project. When the firm is considering mutually exclusive projects, the firm should accept the project with the Lowest Positive/Lowest Negative/Highest Postive/ Highest Negative 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 10%.

	0	1	2	3	4

Project A	-1,070	680	300	280	330
Project B	-1,070	280	235	430	780

What is Project A's NPV? Do not round intermediate calculations. Round your answer to the nearest cent.

What is Project B's NPV? Do not round intermediate calculations. Round your answer to the nearest cent.

If the projects were independent, which project(s) would be accepted?

Neither project / Project A / Project B / Both Project A and B would be accepted.

If the projects were mutually exclusive, which project(s) would be accepted?

Neither project / Project A / Project B / Both Project A and B would be accepted.

The Basics of Capital Budgeting: Evaluating Cash Flows: NPV
The net present value (NPV) method estimates how much a potential project will contribute to [-Select-
and it is the best selection criterion. The -Select-the NPV,
the more value the project adds; and added value means a -Select- stock price. In equation form, the NPV is defined as:
CF1
CF₂
CFN
N CFt
NPV = CFO +
+
+
2
N
t=0
(1+r)
(1+1)^
(1+x)
Project A
Project B
CFt is the expected net cash flow at Time t, r is the project's risk-adjusted cost of capital, 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 [-Select- When the firm is considering independent projects, if the project's NPV exceeds zero the firm
should -Select- the project. When the firm is considering mutually exclusive projects, the firm should accept the project with the -Select-
✓ NPV.
2
$
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 10%.
0
1
4
3
-1,070
-1,070
680
280
What is Project A's NPV? Do not round intermediate calculations. Round your answer to the nearest cent.
300
235
-Select-
1
280
430
+
330
780
1+r
If the projects were independent, which project(s) would be accepted?
would be accepted.
What is Project B's NPV? Do not round intermediate calculations. Round your answer to the nearest cent.
=
t

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