Question

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?

Answer 1

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