Question

Project S requires an initial outlay at t = 0 of $11,000, and its expected cash flows would be $6,500 per year for 5 years. Mutually exclusive Project L requires an initial outlay at t = 0 of $46,500, and its expected cash flows would be $14,500 per year for 5 years. If both projects have a WACC of 13%, which project would you recommend?

Select the correct answer.

a. Project S, since the NPVS > NPVL.

b. Both Projects S and L, since both projects have IRR's > 0.

c. Neither Project S nor L, since each project's NPV < 0.

d. Project L, since the NPVL > NPVS.

e. Both Projects S and L, since both projects have NPV's > 0.

Answer 1

NPV of Project S

NPV :
NPV = PV of Cash Inflows - PV of Cash Outflows
If NPV > 0 , Project can be accepted
NPV = 0 , Indifference point. Project can be accepted/ Rejected.
NPV < 0 , Project will be rejected.

Year	CF	PVF@13%	Dic CF
0	$-11,000.00	1	$-11,000.00
1	$    6,500.00	0.8850	$    5,752.21
2	$    6,500.00	0.7831	$    5,090.45
3	$    6,500.00	0.6931	$    4,504.83
4	$    6,500.00	0.6133	$    3,986.57
5	$    6,500.00	0.5428	$    3,527.94
NPV	$ 11,862.00

NPV of Project L

Year	CF	PVF@13%	Dic CF
0	$-46,500.00	1	$-46,500.00
1	$ 14,500.00	0.8850	$ 12,831.86
2	$ 14,500.00	0.7831	$ 11,355.63
3	$ 14,500.00	0.6931	$ 10,049.23
4	$ 14,500.00	0.6133	$    8,893.12
5	$ 14,500.00	0.5428	$    7,870.02
NPV	$    4,499.85

PVF = 1/ (1+r)^n

r = Interest rate

n = Tme Gap

OPtion 1 has to be selcted, as the projects are mutually exclusive, the project with higher NPV has to be selected

Pls do rate, if the answer is correct and comment, if any further assistance is required.