Question

Project S costs $19,000 and its expected cash flows would be $7,000 per year for 5 years. Mutually exclusive Project L costs $43,500 and its expected cash flows would be $11,750 per year for 5 years. If both projects have a WACC of 13%, which project would you recommend?

Select the correct answer.

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

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

c. Project L, since the NPVL > NPVS.

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

e. Project S, since the NPVS > NPVL.

Answer 1

Ans e. Project S, since the NPVS > NPVL

PROJECT S
Year	Project Cash Flows (i)	DF@ 13%	DF@ 13% (ii)	PV of Project ( (i) * (ii) )
0	-19000	1	1	(19,000.00)
1	7000	1/((1+13%)^1)	0.885	6,194.69
2	7000	1/((1+13%)^2)	0.783	5,482.03
3	7000	1/((1+13%)^3)	0.693	4,851.35
4	7000	1/((1+13%)^4)	0.613	4,293.23
5	7000	1/((1+13%)^5)	0.543	3,799.32
		NPV	5,620.62

PROJECT L
Year	Project Cash Flows (i)	DF@ 13%	DF@ 13% (ii)	PV of Project ( (i) * (ii) )
0	-43500	1	1	(43,500.00)
1	11750	1/((1+13%)^1)	0.885	10,398.23
2	11750	1/((1+13%)^2)	0.783	9,201.97
3	11750	1/((1+13%)^3)	0.693	8,143.34
4	11750	1/((1+13%)^4)	0.613	7,206.50
5	11750	1/((1+13%)^5)	0.543	6,377.43
		NPV	(2,172.53)