Your supervisor has asked you to examine 2 mutually exclusive projects and advis
ID: 2672742 • Letter: Y
Question
Your supervisor has asked you to examine 2 mutually exclusive projects and advise as to selection. Use the three DCF methods to arrive at a decision regarding the following mutually exclusive projects. If there is a conflict between the results use the appropriate methodology (HINT: Fisher Intersection) to resolve this and decide which project we should undertake.
• Our cost of capital for both projects is 8%;
• our initial outlay for both projects is $500,000;
• Both projects will be completed in 5 years.
Project A will return $150,000 at the end of each year for 5 years.
Project B will return no cash flow for years one and two, and then it will generate $275,000 for the next three years.
Explanation / Answer
NPV of project A = $91,580.10 NPV of project B = $107,597.45 so, project B should be chosen
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