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)?

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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

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