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 10%.

	0		1		2		3		4
Project A	-1,100		630		370		290		340
Project B	-1,100		230		305		440		790

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

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

Answer 1

Answer

1. What is Project A's NPV?

Answer = 229

Calculation of NPV (Net Present Value)

NPV = Present Value of future cash inflows – Initial Investment

Calculation of Present value of cash inflows for project - A

Year	Cash Flow	Present Value Factor @ 10% (WACC)	Present Value of cash flow
(I)	(II)	(III)	(II) * (III)
1	630	0.9090	572.67
2	370	0.8264	305.768
3	290	0.7513	217.877
4	340	0.6830	232.22
Present Value of the Cash flows inflows			1328.535

Initial Investment = 1,100/- (provided in the question)

NPV = 1,328.535 – 1,100.

            =228.535

         = 229

2. What is Project B's NPV?
   Answer = 231

Calculation of NPV (Net Present Value)

NPV = Present Value of future cash inflows – Initial Investment

Calculation of Present value of cash inflows for project - B

Year	Cash Flow	Present Value Factor @ 10% (WACC)	Present Value of cash flow
(I)	(II)	(III)	(II) * (III)
1	230	0.9090	209.07
2	305	0.8264	252.052
3	440	0.7513	330.572
4	790	0.6830	539.57
Present Value of the Cash flows inflows			1331.264

Initial Investment = 1,100/- (provided in the question)

NPV = 1,331.264 – 1,100.

            =231.264

         = 231

Calculation of Discounting Factor

Discount Factor = 1/ (1+R) ^N

R = Discount Rate (i.e. = 10%)

N = No of years

E.g. for year 2 Discount Factor = 1/ (1.10)²

                                                                ⁼ 1/ (1.10) (1.10)

                                                = 0.8264