Quantitative Problem: Bellinger Industries is considering two projects for inclu
ID: 2789677 • 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 8%
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?
-NEITHER, PROJECT A, PROJECT B, OR BOTH PROJECTS A & B
If the projects were mutually exclusive, which project(s) would be accepted?
-NEITHER, PROJECT A, PROJECT B, OR BOTH PROJECTS A & B
Explanation / Answer
NPV is calculated by discounting the cashflows
PV = C/(1+r)^n
C - Cashflow
r - Discount rate
n - years to the cashflow
Project A:
NPV = -950 + 630/(1+0.08)^1 + 370/(1+0.08)^2 + 240/(1+0.08)^3 + 290/(1+0.08)^4 = $354.23
Project B:
NPV = -950 + 230/(1+0.08)^1 + 305/(1+0.08)^2 + 390/(1+0.08)^3 + 740/(1+0.08)^4 = $377.97
- If independent accept both projects as NPV is positive for both
- If mutually exclusive, accept project B, as NPV is higher than project A.