The net present value (NPV) method estimates how much a potential project will contribute to shareholders' wealth, and it is the best selection criterion. The larger value the project adds; and added value means a higher stock price. In equation form, the NPV is defined as: 660 260 360 295 NPV = CFO + 3 CFt is the expected cash flow at Time t, r is the project's risk-adjusted cost of capital, and N is its life, and cash outflows are treated as negative cash flows. The NPV calculation assumes that cash inflows can be reinvested at the project's risk-adjusted [WACC ✓✓. When the firm is considering independent projects, if the project's NPV exceeds zero the firm should [accept V ✔ the project. When the firm is considering mutually exclusive projects, the firm should accept the project with the highest positive ✔✔✔ NPV. 250 400 CF₁ CF₂ + (1+x)" (1+7) ² 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 9%. 0 1 2 4 +...+ Project A -1,170 Project B -1,170 What is Project A's NPV? Do not round intermediate calculations. Round your answer to the nearest cent. $ 300 750 CFN CF₁ N (1+7) M two (1+r)t the NPV, the more ► Show All Feedback What is Project B's NPV? Do not round intermediate calculations. Round your answer to the nearest cent. $
Net Present Value
Net present value is the most important concept of finance. It is used to evaluate the investment and financing decisions that involve cash flows occurring over multiple periods. The difference between the present value of cash inflow and cash outflow is termed as net present value (NPV). It is used for capital budgeting and investment planning. It is also used to compare similar investment alternatives.
Investment Decision
The term investment refers to allocating money with the intention of getting positive returns in the future period. For example, an asset would be acquired with the motive of generating income by selling the asset when there is a price increase.
Factors That Complicate Capital Investment Analysis
Capital investment analysis is a way of the budgeting process that companies and the government use to evaluate the profitability of the investment that has been done for the long term. This can include the evaluation of fixed assets such as machinery, equipment, etc.
Capital Budgeting
Capital budgeting is a decision-making process whereby long-term investments is evaluated and selected based on whether such investment is worth pursuing in future or not. It plays an important role in financial decision-making as it impacts the profitability of the business in the long term. The benefits of capital budgeting may be in the form of increased revenue or reduction in cost. The capital budgeting decisions include replacing or rebuilding of the fixed assets, addition of an asset. These long-term investment decisions involve a large number of funds and are irreversible because the market for the second-hand asset may be difficult to find and will have an effect over long-time spam. A right decision can yield favorable returns on the other hand a wrong decision may have an effect on the sustainability of the firm. Capital budgeting helps businesses to understand risks that are involved in undertaking capital investment. It also enables them to choose the option which generates the best return by applying the various capital budgeting techniques.
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 2 images
