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: 2 3 4 Project 1$350 $60 $60 $60 $240 $240 5350 %350 $55 $5555s Project 2 $450 $350 $350 $55$55$5!5 Which project would you recommend? Select the correct answer. a. Project 1, since the NPV1> NPV2. b. Neither Project 1 nor 2, since each project's NPV NPV1 d. Both Projects 1 and 2, since both projects have IRR's> 0 e. Both Projects 1 and 2, since both projects have NPV's > 0.

Explanation / Answer

Ans C) Project 2, since NPV2 > NPV1

Year Project 1 (i) Project 2 (ii) DF@ 10% (iii) PV of Project 1 ( (i) * (iii) ) PV of Project 2 ( (ii) * (iii) ) 0 -350 -450 1 -350 -450 1 60 350 0.909 54.55 318.18 2 60 350 0.826 49.59 289.26 3 60 55 0.751 45.08 41.32 4 240 55 0.683 163.92 37.57 5 240 55 0.621 149.02 34.15 NPV 112.16 270.48

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