Capital budgeting criteria: mutually exclusive projects Project S costs $11,000

Question

Capital budgeting criteria: mutually exclusive projects

Project S costs $11,000 and its expected cash flows would be $7,000 per year for 5 years. Mutually exclusive Project L costs $33,500 and its expected cash flows would be $10,900 per year for 5 years. If both projects have a WACC of 12%, which project would you recommend?

Select the correct answer.

I. Both Projects S and L, since both projects have IRR's > 0. II. Project S, since the NPVS > NPVL. III. Project L, since the NPVL > NPVS. IV. Both Projects S and L, since both projects have NPV's > 0. V. Neither S or L, since each project's NPV < 0.

Explanation / Answer

NPV of S = 14,233

Similarly NPV of L = 5,792.06

12.00% Cash flows Year Discounted CF            (11,000.00) 0 -11000.00                7,000.00 1 6250.00                7,000.00 2 5580.36                7,000.00 3 4982.46                7,000.00 4 4448.63                7,000.00 5 3971.99

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