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 10%.

	0		1		2		3		4
Project A	-1,020		660		375		260		310
Project B	-1,020		260		310		410		760

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

Project A

Net present value is solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$1,020. It is entered with a negative sign since it is a cash outflow.
• Cash flow for all the years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow, press the NPV button and enter the weighted average cost of capital of 10%.
• Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows at 10% the weighted average cost of capital is $296.99

Project B

Net present value is solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$1,020. It is entered with a negative sign since it is a cash outflow.
• Cash flow for all the years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow, press the NPV button and enter the weighted average cost of capital of 10%.
• Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows at 10% the weighted average cost of capital is $299.69

b.If the projects are independent, both the projects would be accepted since they have a positive net present value. Projects with a positive net present value are accepted in case of independent projects.

c.If the projects are mutually exclusive, project A would be accepted since it has the higher net present value.

In case of any query, kindly comment on the solution.