The net present value (NPV) rule is considered one of the most common and preferred criteria that generally lead to good investment decisions. Consider this case: Suppose Black Sheep Broadcasting Company is evaluating a proposed capital budgeting project (project Alpha) that will require an initial investment of $550,000. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $350,000 Year 2 $450,000 Year 3 $500,000 Year 4 $450,000 Black Sheep Broadcasting Company’s weighted average cost of capital is 7%, and project Alpha has the same risk as the firm’s average project. Based on the cash flows, what is project Alpha’s net present value (NPV)? Black Sheep Broadcasting Company’s decision to accept or reject project Alpha is independent of its decisions on other projects. If the firm follows the NPV method, it should project Alpha.
The net present value (NPV) rule is considered one of the most common and preferred criteria that generally lead to good investment decisions. Consider this case: Suppose Black Sheep Broadcasting Company is evaluating a proposed capital budgeting project (project Alpha) that will require an initial investment of $550,000. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $350,000 Year 2 $450,000 Year 3 $500,000 Year 4 $450,000 Black Sheep Broadcasting Company’s weighted average cost of capital is 7%, and project Alpha has the same risk as the firm’s average project. Based on the cash flows, what is project Alpha’s net present value (NPV)? Black Sheep Broadcasting Company’s decision to accept or reject project Alpha is independent of its decisions on other projects. If the firm follows the NPV method, it should project Alpha.
Chapter11: Capital Budgeting And Risk
Section: Chapter Questions
Problem 9P
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The net present value (NPV) rule is considered one of the most common and preferred criteria that generally lead to good investment decisions.
Consider this case:
Suppose Black Sheep Broadcasting Company is evaluating a proposed capital budgeting project (project Alpha) that will require an initial investment of $550,000. The project is expected to generate the following net cash flows:
|
Year
|
Cash Flow
|
|---|---|
| Year 1 | $350,000 |
| Year 2 | $450,000 |
| Year 3 | $500,000 |
| Year 4 | $450,000 |
Black Sheep Broadcasting Company’s weighted average cost of capital is 7%, and project Alpha has the same risk as the firm’s average project. Based on the cash flows, what is project Alpha’s net present value (NPV)?
Black Sheep Broadcasting Company’s decision to accept or reject project Alpha is independent of its decisions on other projects. If the firm follows the NPV method, it should project Alpha.
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