Question

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.

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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