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

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Finance

Suppose Green Caterpillar Garden Supplies Inc. is evaluating aproposed capital budgeting project (project Alpha) that willrequire an initial investment of $450,000. The project is expectedto 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 averagecost of capital is 8%, and project Alpha has the same risk as thefirm’s average project. Based on the cash flows, what is projectAlpha’s net present value (NPV)?
2. Green Caterpillar Garden Supplies Inc.’s decision to acceptor reject project Alpha is independent of its decisions on otherprojects. If the firm follows the NPV method, it should(accept/reject) project Alpha.
3. Which of the following statements best explains what it meanswhen a project has an NPV of $0?
a. When a project has an NPV of $0, the project is earning arate of return equal to the project’s weighted average cost ofcapital. It’s OK to accept a project with an NPV of $0, because theproject is earning the required minimum rate of return.
b. When a project has an NPV of $0, the project is earning arate of return less than the project’s weighted average cost ofcapital. It’s OK to accept the project, as long as the project’sprofit is positive.
c. When a project has an NPV of $0, the project is earning aprofit of $0. A firm should reject any project with an NPV of $0,because the project is not profitable.

Year	Cash Flow
Year 1	$350,000
Year 2	$425,000
Year 3	$500,000
Year 4	$400,000

Answer & Explanation Solved by verified expert

4.1 Ratings (713 Votes)

Solution 1 NPV Year Cash flows PV Factor 8 Present Value 1 35000000 09259 32407407 2 42500000 08573 36436900 3 50000000 07938 See Answer

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Transcribed Image Text

Suppose Green Caterpillar Garden Supplies Inc. is evaluating aproposed capital budgeting project (project Alpha) that willrequire an initial investment of $450,000. The project is expectedto generate the following net cash flows:YearCash FlowYear 1$350,000Year 2$425,000Year 3$500,000Year 4$400,0001. Green Caterpillar Garden Supplies Inc.’s weighted averagecost of capital is 8%, and project Alpha has the same risk as thefirm’s average project. Based on the cash flows, what is projectAlpha’s net present value (NPV)?2. Green Caterpillar Garden Supplies Inc.’s decision to acceptor reject project Alpha is independent of its decisions on otherprojects. If the firm follows the NPV method, it should(accept/reject) project Alpha.3. Which of the following statements best explains what it meanswhen a project has an NPV of $0?a. When a project has an NPV of $0, the project is earning arate of return equal to the project’s weighted average cost ofcapital. It’s OK to accept a project with an NPV of $0, because theproject is earning the required minimum rate of return.b. When a project has an NPV of $0, the project is earning arate of return less than the project’s weighted average cost ofcapital. It’s OK to accept the project, as long as the project’sprofit is positive.c. When a project has an NPV of $0, the project is earning aprofit of $0. A firm should reject any project with an NPV of $0,because the project is not profitable.