Question

Suppose Cold Goose Metal Works Inc. is evaluating a proposed capital budgeting project (project Beta) that will require an initial investment of $2,500,000. The project is expected to generate the following net cash flows:
Year Cash Flow
Year 1 $275,000
Year 2 $450,000
Year 3 $450,000
Year 4 $475,000
Cold Goose Metal Works Inc.'s weighted average cost of capital is 8%, and project Beta has the same risk as the firm's average project. Based on the cash flows, what is project Beta's NPV?
a. -$878,204.
b. -$1,153,204.
c. -$678,204.
d. $1,346,796.
Cold Goose Metal Works Inc.'s decision to accept or reject project Beta is indenpendent of its decisions on other projects. IF the firm follows the NPV method, it should _________ project Beta?a. acceptb. reject

Answer 1

Answer:

-$1,153,204.

reject

Explanation:

Net present value is the present value of after-tax cash flows from an investment less the amount invested.  

NPV can be calculated using a financial calculator  

Cash flow in year 0 = $-2,500,000

Cash flow in Year 1 = $275,000

Cash flow in Year 2 = $450,000

Cash flow in Year 3 = $450,000

Cash flow in Year 4 = $475,000

I = 8%

NPV = -$1,153,204.

Only projects with a positive NPV should be accepted. A project with a negative NPV should not be chosen because it isn't profitable.  

To find the NPV using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.  

3. Press compute