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2 years ago

The net present value (NPV) method estimates how much a potential project will contribute to

Business

1 answer:

lapo4ka [179]2 years ago

6 0

This answer requires that we fill in the blanks

The net present value (NPV) method estimates how much a potential project will contribute to shareholder wealth
The larger the NPV, the more value the project adds; and added value means a higher stock price.
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 higher positive NPV.

What is the NPV?

In order to get the NPV we have to make the following calculations for the projects A and B.

This is calculated as

Project A

-900 + 620/1.08 + 395/1.08² + 200/1.08³ + 250/1.08⁴

= $355. 237

For the project B

We would have to perform similar calculation

Hence we would have

-900 + 620/1.08 + 395/1.08² + 200/1.08³ + 250/1.08⁴

= 378.98

From the calculations that we have done above, we can see that the value for project B is greater hence we have to choose project B.

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