Question

CAPITAL BUDGETING CRITERIA: MUTUALLY EXCLUSIVE PROJECTS Project S costs $18,000 and its expected cash flows would be $5,500 per year for 5 years. Mutually exclusive Project L costs $42,500 and its expected cash flows would be $8,900 per year for 5 years. If both projects have a WACC of 15%, which project would you recommend? Select the correct answer.

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

b. Project L, since the NPVL > NPVS.

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

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

e. Project S, since the NPVS > NPVL.

Answer 1

Ans e. Project S, since the NPVS > NPVL.

NPV of project S is positive and NPV of Project L is negative, So project S is better.

NPV of Project S $ 436.85

Year	Project Cash Flows (i)		DF@ 15% (ii)	PV of Project S ( (i) * (ii) )
0	-18000		1	(18,000.00)
1	5500		0.870	4,782.61
2	5500		0.756	4,158.79
3	5500		0.658	3,616.34
4	5500		0.572	3,144.64
5	5500		0.497	2,734.47
		NPV		436.85

NPV of Project L -$12665.82    (Negative)

Year	Project Cash Flows (i)		DF@ 15% (ii)	PV of Project L ( (i) * (ii) )
0	-42500		1	(42,500.00)
1	8900		0.870	7,739.13
2	8900		0.756	6,729.68
3	8900		0.658	5,851.89
4	8900		0.572	5,088.60
5	8900		0.497	4,424.87
		NPV		(12,665.82)