Quantitative Problem: Bellinger Industries is considering two projects for inclu
ID: 2769172 • Letter: Q
Question
Quantitative Problem: Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 9%. 0 1 2 3 4 Project A -1,070 660 340 280 330 Project B -1,070 260 275 430 780 What is Project A's NPV? Round your answer to the nearest cent. Do not round your intermediate calculations. $ What is Project B's NPV? Round your answer to the nearest cent. Do not round your intermediate calculations. $ If the projects were independent, which project(s) would be accepted?
Explanation / Answer
The NPV of project A is calculated as follows:
The NPV of project B is as follows:
If it was Independent : Both projects A and B
If it was mutually exclusive: Project B
Project A Year Cash flow 0 -1070 1 660 2 340 3 280 4 330 NPV $ 271.67