Question

Ch 10: Foundation Problems - The Basics of Capital Budgeting: Evaluating Cash Flows 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 10% 0 1 2 3 4 Project A -1,110 660 315 260 310 Project B -1,110 260 250 410 760 What is Project A's NPV? Do not round intermediate calculations. Round your answer to the nearest cent. $ 157.41 What is Project B's NPV? Do not round intermediate calculations. Round your answer to the nearest cent. $ 160.11 If the projects were independent, which project(s) would be accepted? would be accepted. Project B If the projects were mutually exclusive, which project(s) would be accepted? would be accepted. Project B

Answer 1

Project A

Net present value can be calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$1,100. Indicate the initial cash flow by a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the weighted average cost of capital of 10%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.

The net present value is $167.41.

Project B

Net present value can be calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$1,100. Indicate the initial cash flow by a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the weighted average cost of capital of 10%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.

The net present value is $170.10.

If the projects are independent, both the projects should be accepted since both of them generate a positive net present value.

If the projects are mutually exclusive, project B should be accepted since it has the highest net present value.

In case of any query, kindly comment on the solution.