Problem 1110 Capital budgeting criteria mutually exclusive p

Problem 11-10 Capital budgeting criteria: mutually exclusive projects A firm with a WACC of 10% is considering the following mutually exclusive projects: 0 2 4 Project A $200 $55 $55 $55 $235 $235 Project B $00 $200 $200 $55 $55 $55 Which project would you recommend? Select the correct answer. OI. Project B, since the NPVs> NPVA II. Project A, since the NPVA>NPVs III. Both Projects A and B, since both projects have IRR\'s >0 IV. Both Projects A and B, since both projects have NPV\'s O. O V. Neither A or B, since each project\'s NPV

Solution

Answer Problem 11-10 Calculation of NPV of the projects Year Discount factor @ 10% Project A Project B Cash Flow Present Value Cash Flow Present Value 0 1 -$200.00 -$200.00 -$700.00 -$700.00 1 0.909091 $55.00 $50.00 $200.00 $181.82 2 0.826446 $55.00 $45.45 $200.00 $165.29 3 0.751315 $55.00 $41.32 $55.00 $41.32 4 0.683013 $235.00 $160.51 $55.00 $37.57 5 0.620921 $235.00 $145.92 $55.00 $34.15 NPV $243.20 -$239.85 The answer is II i.e. Project A , since the NPV-A > NPV-B I would recommend Project A as it has higher NPV. Answer Problem 11-11 Calculation of NPV of the projects Year Discount factor @ 13% Project S Project L Cash Flow Present Value Cash Flow Present Value 0    1.00000 -$13,000.00 -$13,000.00 -$33,500.00 -$33,500.00 1    0.88496 $5,000.00 $4,424.78 $7,700.00 $6,814.16 2    0.78315 $5,000.00 $3,915.73 $7,700.00 $6,030.23 3    0.69305 $5,000.00 $3,465.25 $7,700.00 $5,336.49 4    0.61332 $5,000.00 $3,066.59 $7,700.00 $4,722.55 5    0.54276 $5,000.00 $2,713.80 $7,700.00 $4,179.25 NPV $4,586.16 -$6,417.32 The answer is III i.e. Project S , since the NPV-S > NPV-L I would recommend Project S as it has higher NPV.