Capital budgeting criteria: mutually exclusive projects Project S costs $16, 000

Question

Capital budgeting criteria: mutually exclusive projects Project S costs $16, 000 and its expected cash flows would be $7, 000 per year for 5 years. Mutually exclusive Project L costs $44, 000 and its expected cash flows would be $14, 500 per year for 5 years. If both projects have a WACC of 13%, which project would you recommend? Select the correct answer. I- Project L, since the NPV_L > NPV_S. Neither S or L, since each project's NPV 0. Both Projects S and L, since both projects have IRR's > 0. Project S, since the NPV_S > NPV_L.

Explanation / Answer

NPV S= -16000 + 7000/1.13 +7000/1.13^2 +.................7000/1.13^5

7,628.87

NPV L= -44000 +14500/(1.13) + 14500/(1.13)^2 +...........145000/(1.13)^5

6,194.56

Hence project S is more valuable to the company

Hence select project S

-16000 7000 7000 7000 7000 7000 -44000 14500 14500 14500 14500 14500

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