Question

Project S requires an initial outlay at t = 0 of $14,000, and its expected cash flows would be $4,000 per year for 5 years. Mutually exclusive Project L requires an initial outlay at t = 0 of $25,500, and its expected cash flows would be $12,850 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

	Computation of NPV of both the project
year	Project S	Project L	PVIF @ 13%	Present vlaue S	Present vlaue L
0	-14000	-25500	1	(14,000.00)	(25,500.00)
1	4000	12,850	0.884956	3,539.82	11,371.68
2	4000	12,850	0.783147	3,132.59	10,063.43
3	4000	12,850	0.69305	2,772.20	8,905.69
4	4000	12,850	0.613319	2,453.27	7,881.15
5	4000	12,850	0.54276	2,171.04	6,974.47
	NPV =			68.93	19,696.42
We can see that NPV of L is higher compraed to S . Therefore L should be accepted.
answer is option :
d. Project L, since the NPVL > NPVS.