CAPITAL BUDGETING CRITERIA MUTUALLY EXCLUSIVE PROJECTS Proje

CAPITAL BUDGETING CRITERIA: MUTUALLY EXCLUSIVE PROJECTS Project s costs $15,000 and its expected cash flows would be $5,500 per year for 5 years. Mutually exclusive Project L costs $29,500 and its expected cash flows would be $10,100 per year tor 5 years. If both projects have a WACC of 14%, which project would you recommend? Select the correct answer a. Project L, since the NPV NPVs b. Neither Project S nor L, since each project\'s NPV O c. Project S, since the NPVs NPVL d. Both Projects S and L, since both projects have NPVs > 0. e.Both Projects S and L, since both projects have IRR\'s>O

Solution

Project S

NPV of S = 3,881.95

Project L

NPV of L = 5,174.12

a. Choose Project L since NPV of L > NPV of S

Discount rate	14.0000%
Cash flows	Year	Discounted CF= cash flows/(1+rate)^year	Cumulative cash flow
(15,000.00)	0	(15,000.00)	(15,000.00)
5,500.000	1	4,824.56	(10,175.44)
5,500.000	2	4,232.07	(5,943.37)
5,500.000	3	3,712.34	(2,231.02)
5,500.000	4	3,256.44	1,025.42
5,500.000	5	2,856.53	3,881.95