Evaluating cash flows with the NPV method The net present value (NPV) rule is considered...
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Finance
Evaluating cash flows with the NPV method
The net present value (NPV) rule is considered one of the most common and preferred criteria that generally lead to good investment decisions.
Consider this case:
Suppose Fuzzy Button Clothing Company 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
$325,000
Year 2
$475,000
Year 3
$450,000
Year 4
$425,000
Fuzzy Button Clothing Companys weighted average cost of capital is 7%, and project Alpha has the same risk as the firms average project. Based on the cash flows, what is project Alphas net present value (NPV)?
A) $1,385,186
B) $1,285,186
C) $960,186
D) $1,152,223
Making the accept or reject decision
Fuzzy Button Clothing Companys decision to accept or reject project Alpha is independent of its decisions on other projects. If the firm follows the NPV method, it should (reject/accept) project Alpha.
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