Question

A firm with a WACC of 10% is considering the following mutually exclusive projects: 0 1...

A firm with a WACC of 10% is considering the following mutually exclusive projects:

0 1 2 3 4 5
Project 1 -$250 $40 $40 $40 $210 $210
Project 2 -$500 $250 $250 $145 $145 $145

Which project would you recommend?

Select the correct answer.

a. Both Projects 1 and 2, since both projects have NPV's > 0.
b. Project 2, since the NPV2 > NPV1.
c. Both Projects 1 and 2, since both projects have IRR's > 0.
d. Neither Project 1 nor 2, since each project's NPV < 0.
e. Project 1, since the NPV1 > NPV2.

Homework Answers

Answer #1

NPV of Project 1 is

Which comes out to be

Similarly, NPV of Project 2 is

Which comes out to be

So clearly, Project 2 should be preferred as

Correct option is b)

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