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Suppose Blue Hamster Manufacturing Inc. is evaluating a proposed capital budgeting project (project Beta) that will require an initial investment of $3,225,000. The project is expected to generate the following net cash flows:

Year Cash Flow
Year 1 $275,000
Year 2 $475,000
Year 3 $425,000
Year 4 $400,000

Blue Hamster Manufacturing Inc.'s weighted average cost of capital is 7%, and project Beta has the same risk as the firm's average project. Based on the cash flows, what is project Beta's NPV?

Respuesta :

Answer and Explanation:

The computation of the net present value is shown below:

Year          Cash flows       Discount factor at 7%    Present value

0               -$3,225,000            1                                 -$3,225,000

1                  $275,000        0.934579439                   $257,009.3458

2                 $475,000        0.873438728                   $414,883.3959

3                  $425,000       0.816297877                     $346,926.5977

4                  $400,000       0.762895212                    $305,158.0848

Net present value                                                        -$1,901,022.576

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