Suppose Blue Hamster Manufacturing Inc, is evaluation a proposed capital budgeting project (project alpha) that will...

Suppose Blue Hamster Manufacturing Inc, is evaluation a proposed capital budgeting project (project alpha) that will require an initial investment of $400,000. The project is expected to generate the following net cash flows: year 1 375,000 year 2 425,000 year 3 450,000 year 4 450,000 Blue Hamster Manufacturing Inc’s weighted average cost of the capital is 9%, and project alpha has the same risk as the firm’s average project. Based on the cash flows, what is project Alpha’s net present value (NPV)?

Expert Solution

NPV = PV of Cash Inflows - PV of Cash Outflows

= [$375,000/1.09] + [$425,000/1.09²] + [$450,000/1.09³] + [$450,000/1.09⁴] - $400,000

= $344,036.70 + $357,714 + $347,482.57 + $318,791.35 - $400,000 = $968,024.61

jeff jeffy answered 2 years ago

Suppose Blue Hamster Manufacturing Inc. is evaluating a proposed capital budgeting project (project Alpha) that will...

Suppose Blue Hamster Manufacturing Inc. is evaluating a proposed capital budgeting project (project Alpha) that will require an initial investment of $600,000. The project is expected to generate the following net cash flows: Year Cash Flow 1 $275,000 2 $500,000 3 $425,000 4 $450,000 1. Blue Hamster Manufacturing Inc.’s weighted average cost of capital is 7%, and project Alpha has the same risk as the firm’s average project. Based on the cash flows, what is project Alpha’s net present value...

Suppose Green Caterpillar Garden Supplies Inc. is evaluating a proposed capital budgeting project (project Alpha) that...

Suppose Green Caterpillar Garden Supplies Inc. is evaluating a proposed capital budgeting project (project Alpha) that will require an initial investment of $450,000. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $350,000 Year 2 $425,000 Year 3 $500,000 Year 4 $400,000 1. Green Caterpillar Garden Supplies Inc.’s weighted average cost of capital is 8%, and project Alpha has the same risk as the firm’s average project. Based on the cash flows, what...

ast Tuesday, Blue Hamster Manufacturing Inc. lost a portion of its planning and financial data when...

ast Tuesday, Blue Hamster Manufacturing Inc. lost a portion of its planning and financial data when both its main and its backup servers crashed. The company’s CFO remembers that the internal rate of return (IRR) of Project Lambda is 13.2%, but he can’t recall how much Blue Hamster originally invested in the project nor the project’s net present value (NPV). However, he found a note that detailed the annual net cash flows expected to be generated by Project Lambda. They...

Explain the project evaluation project in relation to capital budgeting and the purpose of investment projects....

Explain the project evaluation project in relation to capital budgeting and the purpose of investment projects. Purposes were categorized into 6 categories: replacement, renewal, expansion, cost-reduction, conforming, and all other projects.

Company X is evaluating a proposed capital budgeting project (project Sigma) that will require an initial...

Company X is evaluating a proposed capital budgeting project (project Sigma) that will require an initial investment of $850,000. Company X has been basing capital budgeting decisions on a project's NPV; however, its new CFO wants to start using the IRR method for capital budgeting decisions. The CFO says that the IRR is a better method because returns in percentage form are easier to understand and compare to required returns. Blue Llama Mining Company's WACC is 9%, and project Sigma...

Internal rate of return (IRR) Ziff Corp. is evaluating a proposed capital budgeting project that will...

Internal rate of return (IRR) Ziff Corp. is evaluating a proposed capital budgeting project that will require an initial investment of $1,550,000. The project is expected to generate the following net cash flows: Year Net Cash Flow 1 $350,000 2 $475,000 3 $400,000 4 $475,000 Ziff Corp. hasbeen basing capital budgeting decisions on a project’s NPV; however, its new CFO wants to start using the internal rate of return (IRR) method for capital budgeting decisions. The CFO says that the...

Net Present Value An organization’s initial outlay for a proposed capital budgeting project is $1,000,000. Use...

Net Present Value An organization’s initial outlay for a proposed capital budgeting project is $1,000,000. Use the table below to calculate the net present value. Free Cash Flows Year Amount Year Amount 1 $250,000.00 4 $310,000.00 2 $60,000.00 5 $75,000.00 3 $0.00 6 $380,000.00 You are the CEO of the company. If the firm’s cost of capital is 8%, how likely would you be to approve this project when the net present value is $1.00? Would you be more or...

Capital Budgeting Example *A proposed drone investment project for AJ-Securities has an equipment cost of $3,750,000....

Capital Budgeting Example *A proposed drone investment project for AJ-Securities has an equipment cost of $3,750,000. The cost will be depreciated straight-line to a zero salvage value over its 30 year life. The firm will also use existing equipment that has been fully depreciated but has a market value of $600,000 at the end-of-life for the project. *The price of the drone service per customer is $3,550 a year but expect price to increase by 2.3% each year. The number...

Capital Budgeting Decision Rules: 1. Payback period approach in capital budgeting evaluation process fails to consider...

Capital Budgeting Decision Rules: 1. Payback period approach in capital budgeting evaluation process fails to consider all cash flows and the time value of money. True False 2. If a project’s NPV is positive, then it is IRR is greater than its cost of capital. True False A project will cost $160,000. The after-tax future cash flows are expected to be $40,000 annually for 7 years. For #3-5. 3. What is the project’s payback period? A. 1.5 yrs B. 2.0...

The capital budgeting process is dependent on the anticipated cash flows generated by a proposed capital...

The capital budgeting process is dependent on the anticipated cash flows generated by a proposed capital project. Research the importance of the price to cash-flow ratio and the free-cash flow in making managerial and investment decisions. Cite at least one recent article in your post and provide a link for your classmates.

Question