CAPITAL BUDGETING CRITERIA MUTUALLY EXCLUSIVE PROJECTS Proje

CAPITAL BUDGETING CRITERIA: MUTUALLY EXCLUSIVE PROJECTS Project S costs $10,000 and its expected cash flows would be $6,500 per year for 5 years. Mutua y exclusive Pro ct L costs $26 500 and its expected cash flows would be S. 00 If both projects have a WACC of 13%, which project would you recommend? Select the correct answer. per year r ? ears. a. Both Projects S and L, since both projects have NPVs > 0. b. Project L, since the NPVL>NPVs C. Neither Project S nor L, since each project\'s NPV 0 d. Both Projects S and L, since both projects have IRR\'s> 0. e. Project S, since the NPVs>NPVL

Solution

Project S :

NPV = Present Value of Cash Inflows - Present Value of Cash Outflows

= [ $ 6,500 * 1/(1.13) ^ 1 +$ 6,500 * 1/(1.13) ^ 2 +$ 6,500 * 1/(1.13) ^ 3+$ 6,500 * 1/(1.13) ^ 4+$ 6,500 * 1/(1.13) ^ 5] - $ 10,000

= $ 12,862.00

Project L :

NPV = Present Value of Cash Inflows - Present Value of Cash Outflows

= [ $ 7,900 * 1/(1.13) ^ 1 +$ 7,900 * 1/(1.13) ^ 2 +$ 7,900* 1/(1.13) ^ 3+$ 7,900* 1/(1.13) ^ 4+$ 7,900* 1/(1.13) ^ 5] - $ 26,500

= $ 1,286.13

Since, the projects are mutually exclusive only one project could be chosen.

Since, the NPV of Project S is higher than that of Project L, the same would be chosen.

Hence, the correct answer is e. Project S, since the NPVs > NPVL