CAPITAL BUDGETING CRITERIA: MUTUALLY EXCLUSIVE PROJECTS A firm with a WACC of 10

Question

CAPITAL BUDGETING CRITERIA: MUTUALLY EXCLUSIVE PROJECTS A firm with a WACC of 10% is considering the following mutually exclusive projects: 4 Project 1$500 $80 $80 $80 $205 $205 $80 $80$80 Project 2$650 $300 $300 Which project would you recommend? Select the correct answer. a. Project 2, since the NPV2> NPV b. Neither Project 1 nor 2, since each project's NPV 0 c. Project 1, since the NPV1 NPV2 d. Both Projects 1 and 2, since both projects have NPV's > 0. e. Both Projects 1 and 2, since both projects have IRR's> 0.

Explanation / Answer

Ans a) Project 2, Since the NPV2 > NPV1

60.11

PROJECT 1 Year Project Cash Flows (i) DF@ 10% (ii) PV of Project Y ( (i) * (ii) ) 0 -500 1                         (500.00) 1 80 0.909                             72.73 2 80 0.826                             66.12 3 80 0.751 60.11 4 205 0.683                           140.02 5 205 0.621                           127.29 NPV                           (33.75) PROJECT 2 Year Project Cash Flows (i) DF@ 10% (ii) PV of Project Y ( (i) * (ii) ) 0 -650 1                         (650.00) 1 300 0.909                           272.73 2 300 0.826                           247.93 3 80 0.751

60.11

4 80 0.683                             54.64 5 80 0.621                             49.67 NPV                             35.08

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