Suppose Fuzzy Button Clothing 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 $375,000
Year 2 $475,000
Year 3 $425,000
Year 4 $500,000

Required:
Fuzzy Button Clothing 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)?

Project Net Present Value = $943,724.89

Explanation:

The NPV is the difference between the PV of cash inflows and the PV of cash outflows. A positive NPV implies a good investment decision and a negative figure implies the opposite.  

NPV of an investment:  

NPV = PV of Cash inflows - PV of cash outflow    

PV of cash inflow=   $375,000 ×1.07^(-1) + (475,000×  1.07^(-2)+ 425,000× 1.07^(-3) + 500,000 × 1.07^(-4) = 1,493,724.889

Initial cost = 550,000

NPV = 1,493,724.88  - 550,000 = 943,724.89

Project Net Present Value = $943,724.89

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