Consider this case: Suppose Cute Camel Woodcraft Company is evaluating a propose
ID: 2617856 • Letter: C
Question
Consider this case: Suppose Cute Camel Woodcraft Company is evaluating a proposed capital budgeting project (project Alpha) require an initial investment of $550,000. The project is expected to generate the following net cash flows: Year Year 1 Year 2 Year 3 Year 4 Cash Flow $325,000 $500,000 $425,000 $450,000 Cute Camel woodcraft Company's weighted average cost of capital is 8%, and project Alpha has the same ris firm's average project. Based on the cash flows, what is project Alpha's net present value (NPV)? O $847,737 O $1,017,284 O $1,272,737 o $1,397,737 Making the accept or reject decision Cute Camel Woodcraft Company's decision to accept or reject project Alpha is independent of its decisions on o projects. If the firm follows the NPV method, it should project Alpha.Explanation / Answer
Answer is option A.$847,737
Net Present Value (NPV)
Net present value (NPV) = Present Vale of cash flows – Initial Outlay
= [ $325,000x(PVF 8%,1Year) + $500,000x(PVF 8%,2Year) + $425,000x(PVF 8%,3Year) + 4,50,000x(PVF 8%,4Year) ] - $550,000
= ($325,000 x 0.9260) + ($500,000 x 0.8573) + ($425,000 x 0.7938) + ($4,50,000x0.7350) -550,000
=300950+428650+337365+330750-550,000
=847715(Approximate to 847737)
Since the NPV is positive Cute camel woodcraft can Accept the project.