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Suppose Green Caterpillar Garden Supplies 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 $300,000
Year 2 $475,000
Year 3 $475,000
Year 4 $400,000
Green Caterpillar Garden Supplies Inc'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?
a. -$4,156,661
b. -$1,406,661
c. -$931,661
d. -$1,617,660

Respuesta :

Answer:

-$1,899,815.41

Explanation:

The computation of the net present value of the project Beta is shown below

Year      Cash inflows     Discount factor at 9%     Present value  

0             -3225000               1                                   -3225000

1               300000                   0.917431193               275229.3578

2              475000                  0.841679993               399797.9968

3              475000                   0.77218348                366787.153

4              400000                   0.708425211            283370.0844

Net present value                                                   -$1,899,815.408

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