Question

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 7%.

	0		1		2		3		4
Project A	-1,100		670		400		190		240
Project B	-1,100		270		335		340		690

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

Answer 1

Project A's NPV

	Cash Flow	Present Value of 1 at 7%	Present Value
Year 1	670.00	0.9346	626.18
Year 2	400.00	0.8734	349.36
Year 3	190.00	0.8163	155.10
Year 4	240.00	0.7629	183.10
Totals	1,500.00		1,313.74
Amount invested			(1,100.00)
Net present value			213.74

• Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over the life of an investment project.
• NPV is used to evaluate investment projects in capital budgeting.
• A project with a positive NPV is accepted. A positive NPV indicates that the project will result in net cash inflows in today's dollars.
• A project with a negative NPV is rejected. A negative NPV indicates that the project will result in net cash outflows in today's dollars.
• The cash flows are discounted at a required rate of return. It may be a weighted average cost of capital, cost of debt, etc.
• In this case, the firm's WACC of 7% is the minimum required rate of return.