Question

Project S requires an initial outlay at t = 0 of $13,000, and its expected cash flows would be $7,000 per year for 5 years. Mutually exclusive Project L requires an initial outlay at t = 0 of $34,500, and its expected cash flows would be $14,200 per year for 5 years. If both projects have a WACC of 14%, which project would you recommend?

Answer 1

Ans Choose Project L and reject Project S.

If projects are mutually exclusive then only one project can be selected. In given case NPV of Project L is more than NPV of Project S. So, we must select Project L.

PROJECT S
Year	Project Cash Flows (i)	DF@ 14%	DF@ 14% (ii)	PV of Project ( (i) * (ii) )
0	-13000	1	1	(13,000.00)
1	7000	1/((1+14%)^1)	0.877193	6,140.35
2	7000	1/((1+14%)^2)	0.769468	5,386.27
3	7000	1/((1+14%)^3)	0.674972	4,724.80
4	7000	1/((1+14%)^4)	0.592080	4,144.56
5	7000	1/((1+14%)^5)	0.519369	3,635.58
		NPV	11,031.57

PROJECT L
Year	Project Cash Flows (i)	DF@ 14%	DF@ 14% (ii)	PV of Project ( (i) * (ii) )
0	-34500	1	1	(34,500.00)
1	14200	1/((1+14%)^1)	0.877193	12,456.14
2	14200	1/((1+14%)^2)	0.769468	10,926.44
3	14200	1/((1+14%)^3)	0.674972	9,584.60
4	14200	1/((1+14%)^4)	0.592080	8,407.54
5	14200	1/((1+14%)^5)	0.519369	7,375.04
		NPV	14,249.75