The following are two projects that you company is considering. Your firm’s WACC

Question

The following are two projects that you company is considering. Your firm’s WACC is 10% and the projects are mutually exclusive. Which project should your firm take? Use both methods for project of unequal lives

Year                           Project A (four year Life)    Project B (eight year Life)

0                                  -50,000                           -120,000

1                                  10,000                            20,000

2                                  10,000                            20,000

3                                  20,000                            14,000

4                                  30,000                            30,000

5                                  0                                      20,000

6                                  0                                      20,000

7                                  0                                      35,000

8                                  0                                      30,000

Explanation / Answer

Project A:

NPV = $ 2,871

Profitability Index = Present value of cash inflows / Present value of cash outflows = 52,871 / 50,000 = 1.057

Project B:

NPV = $ 1,383

Profitability Index = 121,383 / 120,000 = 1.011

Project A should be taken up.

Year 0 1 2 3 4 Cash flows ( 50,000) 10,000 10,000 20,000 30,000 PV factor at 10% 1 0.9091 0.8264 0.7513 0.6830 Present values ( 50,000) 9,091 8,264 15,026 20,490 Net present value 2,871

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