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value (NPV) Consider this case: Year Cash Flow Year 1 $300,000 Year 2 $400,000 Year 3 $450,000 Year 4 $450,000 Suppose Lumbering Ox Truckmakers is evaluating a proposed capital budgeting project (project Beta) that will require an initial investment of $2,500,000. The project is expected to generate the following net cash flows: O-$821,825 Lumbering Ox Truckmakers's weighted average cost of capital is 9%, and project Beta has the same risk as the firm's average project. Based on the cash flows, what is project Beta's NPV? O-$1,221,825 that generally lead to good -$771,825 O $1,278,175 sument decisions. Making the accept or reject decision Lumbering Ox Truckmakers's decision to accept or reject project Beta is independent of its decisions on other projects. If the firm follows the NPV method, it should project Beta. Suppose your boss has asked you to analyze two mutually exclusive projects-project A and project B. Both projects require the same investment amount, and the sum of cash inflows of Project A is larger than the sum of cash inflows of project B. A coworker told you that you don't need to do an NPV analysis of the projects because you already know that project A will have a larger NPV than project B. Do you agree with your coworker's statement?

value (NPV) Consider this case: Year Cash Flow Year 1 $300,000 Year 2 $400,000 Year 3 $450,000 Year 4 $450,000 Suppose Lumbering Ox Truckmakers is evaluating a proposed capital budgeting project (project Beta) that will require an initial investment of $2,500,000. The project is expected to generate the following net cash flows: O-$821,825 Lumbering Ox Truckmakers's weighted average cost of capital is 9%, and project Beta has the same risk as the firm's average project. Based on the cash flows, what is project Beta's NPV? O-$1,221,825 that generally lead to good -$771,825 O $1,278,175 sument decisions. Making the accept or reject decision Lumbering Ox Truckmakers's decision to accept or reject project Beta is independent of its decisions on other projects. If the firm follows the NPV method, it should project Beta. Suppose your boss has asked you to analyze two mutually exclusive projects-project A and project B. Both projects require the same investment amount, and the sum of cash inflows of Project A is larger than the sum of cash inflows of project B. A coworker told you that you don't need to do an NPV analysis of the projects because you already know that project A will have a larger NPV than project B. Do you agree with your coworker's statement?

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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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 Lumbering Ox Truckmakers is evaluating a proposed capital budgeting project (project Beta) that will require an initial investment of $2,500,000. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $300,000 Year 2 $400,000 Year 3 $450,000 Year 4 $450,000 Lumbering Ox Truckmakers's weighted average cost of capital is 9%, and project Beta has the same risk as the firm's average project. Based on the cash flows, what is project Beta's NPV? O-$821,825 O $1,221,825 O -$771,825 O $1,278,175 Making the accept or reject decision Lumbering Ox Truckmakers's decision to accept or reject project Beta is independent of its decisions on other projects. If the firm follows the NPV method, it should project Beta. Suppose your boss has asked you to analyze two mutually exclusive projects-project A and project B. Both projects require the same investment amount, and the sum of cash inflows of Project A is larger than the sum of cash inflows of project B. A coworker told you that you don't need to do an NPV analysis of the projects because you already know that project A will have a larger NPV than project B. Do you agree with your coworker's statement? No. the NPV calculation is based on percentage returns, so the size of a proiect's cash flows does not affect a proiect's NPV.
Transcribed Image Text: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 Lumbering Ox Truckmakers is evaluating a proposed capital budgeting project (project Beta) that will require an initial investment of $2,500,000. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $300,000 Year 2 $400,000 Year 3 $450,000 Year 4 $450,000 Lumbering Ox Truckmakers's weighted average cost of capital is 9%, and project Beta has the same risk as the firm's average project. Based on the cash flows, what is project Beta's NPV? O-$821,825 O $1,221,825 O -$771,825 O $1,278,175 Making the accept or reject decision Lumbering Ox Truckmakers's decision to accept or reject project Beta is independent of its decisions on other projects. If the firm follows the NPV method, it should project Beta. Suppose your boss has asked you to analyze two mutually exclusive projects-project A and project B. Both projects require the same investment amount, and the sum of cash inflows of Project A is larger than the sum of cash inflows of project B. A coworker told you that you don't need to do an NPV analysis of the projects because you already know that project A will have a larger NPV than project B. Do you agree with your coworker's statement? No. the NPV calculation is based on percentage returns, so the size of a proiect's cash flows does not affect a proiect's NPV.
Making the accept or reject decision Lumbering Ox Truckmakers's decision to accept or reject project Beta is independent of its decisions on other projects. If the firm follows the NPV method, it should ▼ project Beta. Suppose your boss has asked you to analyze two mutually exclusive projects-project A and project B. Both projects require the same investment amount, and the sum of cash inflows of Project A is larger than the sum of cash inflows of project B. A coworker told you that you don't need to do an NPV analysis of the projects because you already know that project A will have a larger NPV than project B. Do you agree with your coworker's statement? O No, the NPV calculation is based on percentage returns, so the size of a project's cash flows does not affect a project's NPV. O Yes, project A will always have the largest NPV, because its cash inflows are greater than project B's cash inflows. O No, the NPV calculation will take into account not only the projects' cash inflows but also the timing of cash inflows and outflows. Consequently, project B could have a larger NPV than project A, even though project A has larger cash inflows.
Transcribed Image Text:Making the accept or reject decision Lumbering Ox Truckmakers's decision to accept or reject project Beta is independent of its decisions on other projects. If the firm follows the NPV method, it should ▼ project Beta. Suppose your boss has asked you to analyze two mutually exclusive projects-project A and project B. Both projects require the same investment amount, and the sum of cash inflows of Project A is larger than the sum of cash inflows of project B. A coworker told you that you don't need to do an NPV analysis of the projects because you already know that project A will have a larger NPV than project B. Do you agree with your coworker's statement? O No, the NPV calculation is based on percentage returns, so the size of a project's cash flows does not affect a project's NPV. O Yes, project A will always have the largest NPV, because its cash inflows are greater than project B's cash inflows. O No, the NPV calculation will take into account not only the projects' cash inflows but also the timing of cash inflows and outflows. Consequently, project B could have a larger NPV than project A, even though project A has larger cash inflows.
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