Question

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 8%.

	0		1		2		3		4
Project A	-1,170		620		370		250		300
Project B	-1,170		220		305		400		750

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.

$

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



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

Answer 1

Following steps need to be taken to compute Net Present Value (NPV):

1. Write all the given information.

2. Compute discount factor for each cash flow. This done by the formula 1/(1+r)ⁿ where r is the rate of interest and n is the year.

3. Calculate the Discounted cash flow by finding the product of cash flow and its corresponding discount rate.

4. Add all the discounted cash flows to calculate Net Present Value (NPV).

The table below shows the value of all heads described above.

A) Project A NPV = $140.26

B) Project B NPV = $164.00

C) When the projects are independent, both of them can be selected as both have positive NPV.

D) When the projects are mutually exclusive, project B should be selected as it has higher NPV than project A.