Question

A firm with a WACC of 10% is considering the following mutually exclusive projects: 0 1 2 3 4 5 Project 1 -$200 $40 $40 $40 $235 $235 Project 2 -$450 $200 $200 $80 $80 $80 Which project would you recommend? Select the correct answer.

a. Both Projects 1 and 2, since both projects have IRR's > 0.

b. Neither Project 1 nor 2, since each project's NPV < 0.

c. Both Projects 1 and 2, since both projects have NPV's > 0.

d. Project 2, since the NPV2 > NPV1.

e. Project 1, since the NPV1 > NPV2.

Answer 1

Ans e. Project 1, since the NPV1 > NPV2.

PROJECT 1
Year	Project Cash Flows (i)	DF@ 10%	DF@ 10% (ii)	PV of Project ( (i) * (ii) )
0	-200	1	1	(200.00)
1	40	1/((1+10%)^1)	0.909	36.36
2	40	1/((1+10%)^2)	0.826	33.06
3	40	1/((1+10%)^3)	0.751	30.05
4	235	1/((1+10%)^4)	0.683	160.51
5	235	1/((1+10%)^5)	0.621	145.92
		NPV		205.90

PROJECT 2
Year	Project Cash Flows (i)	DF@ 10%	DF@ 10% (ii)	PV of Project ( (i) * (ii) )
0	-450	1	1	(450.00)
1	200	1/((1+10%)^1)	0.909	181.82
2	200	1/((1+10%)^2)	0.826	165.29
3	80	1/((1+10%)^3)	0.751	60.11
4	80	1/((1+10%)^4)	0.683	54.64
5	80	1/((1+10%)^5)	0.621	49.67
		NPV		61.53