CAPITAL BUDGETING CRITERIA: MUTUALLY EXCLUSIVE PROJECTS
Project S costs $15,000 and its expected cash flows would be $6,500 per year for 5 years. Mutually exclusive Project L costs $45,000 and its expected cash flows would be $9,900 per year for 5 years. If both projects have a WACC of 16%, which project would you recommend?
Select the correct answer.









Present value of annuity=Annuity[1(1+interest rate)^time period]/rate
S:
Present value of annuity=$6500[1(1.16)^5]/0.16
=$6500*3.274293654
=$21282.91
NPV=Present value of inflowsPresent value of outflows
=$21282.91$15000
=$6282.91
L:
Present value of annuity=$9900[1(1.16)^5]/0.16
=$9900*3.274293654
=$32415.51
NPV=Present value of inflowsPresent value of outflows
=$32415.51$45000
=(12584.49)(Negative).
Hence S must be chosen having posiitve and higher NPV.
Hence the correct option is A.
Get Answers For Free
Most questions answered within 1 hours.