A firm with a WACC of 10% is considering the following mutually exclusive projec

Question

A firm with a WACC of 10% is considering the following mutually exclusive projects:

0                    1                      2                           3                        4                          5

Pro-A   -$400              $55                  $55                      $55                    $225                     $225

Pro-B   -$600              $300                $300                    $50                    $50                       $49

Which project would you recommend? Explain.

Explanation / Answer

NPV OF PROJECT A = -400+(55/1.1^1)+(55/1.1^2)+(55/1.1^3)+(225/1.1^4)+(225/1.1^5)= $30.162

NPV OF PROJECT B =  -600+(300/1.1^1)+(300/1.1^2)+(50/1.1^3)+(50/1.1^4)+(49/1.1^5)= $22.803

SINCE, NPV of A > NPV of B

we should choose Project A

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