Quantitative Problem: Bellinger Industries is considering two projects for inclu
ID: 2786766 • 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 7%.
0 1 2 3 4
Project A -1,130 680 335 240 290
Project B -1,130 280 270 390 740
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?
If the projects were mutually exclusive, which project(s) would be accepted?
Explanation / Answer
Project A:
NPV = Pv of Cash Inflows - PV of Cash Outflows
Thus NPV = 680 / (1+ 0.07) + 335 / (1+ 0.07)2 + 240 / (1+ 0.07)3 + 290 / (1+ 0.07)4 - 1130
NPV = 1345.267 - 1130 = 215.26 Dollars whic rounded to nearest cent would be equal to 215.3 Dollars
Project B:
NPV = Pv of Cash Inflows - PV of Cash Outflows
Thus NPV = 280 / (1+ 0.07) + 270 / (1+ 0.07)2 + 390 / (1+ 0.07)3 + 740 / (1+ 0.07)4 - 1130
NPV = 1380.409 - 1130 = 240.409 Dollars whic rounded to nearest cent would be equal to 240.4 Dollars
If the projects were independent, we can select both the Projects as both have positive NPV
If the projects were mutually exclusive, we can choose only 1 Project. Thus we will chose B as it has a higher NPV.