CAPITAL BUDGETING CRITERIA: MUTUALLY EXCLUSIVE PROJECTS
A firm with a WACC of 10% is considering the following mutually exclusive projects:
0  1  2  3  4  5 
Project 1  $250  $75  $75  $75  $170  $170 
Project 2  $700  $200  $200  $50  $50  $50 
Which project would you recommend?
Select the correct answer.









Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)
Project 1:
Present value of inflows=75/1.1+75/1.1^2+75/1.1^3+170/1.1^4+170/1.1^5
=$408.18
NPV=Present value of inflowsPresent value of outflows
=408.18250
=$158.18
Project 2:
Present value of inflows=200/1.1+200/1.1^2+50/1.1^3+50/1.1^4+50/1.1^5
=$449.87
NPV =$449.87$700
=($250.13)(Approx)(Negative).
Hence Project 1 must be selected having higher and positive NPV.(C).
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