CAPITAL BUDGETING CRITERIA: MUTUALLY EXCLUSIVE PROJECTS Project s costs $15,000

Question

CAPITAL BUDGETING CRITERIA: MUTUALLY EXCLUSIVE PROJECTS Project s costs $15,000 and its expected cash flows would be $5,500 per year for 5 years. Mutually exclusive Project L costs $29,500 and its expected cash flows would be $10,100 per year tor 5 years. If both projects have a WACC of 14%, which project would you recommend? Select the correct answer a. Project L, since the NPV NPVs b. Neither Project S nor L, since each project's NPV O c. Project S, since the NPVs NPVL d. Both Projects S and L, since both projects have NPVs > 0. e.Both Projects S and L, since both projects have IRR's>O

Explanation / Answer

Project S

NPV of S = 3,881.95

Project L

NPV of L = 5,174.12

a. Choose Project L since NPV of L > NPV of S

Discount rate 14.0000% Cash flows Year Discounted CF= cash flows/(1+rate)^year Cumulative cash flow            (15,000.00) 0                           (15,000.00)                       (15,000.00)               5,500.000 1                               4,824.56                       (10,175.44)               5,500.000 2                               4,232.07                          (5,943.37)               5,500.000 3                               3,712.34                          (2,231.02)               5,500.000 4                               3,256.44                            1,025.42               5,500.000 5                               2,856.53                            3,881.95

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