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  $350  $40  $40  $40  $215  $215 
Project 2  $650  $200  $200  $70  $70  $70 
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=40/1.1+40/1.1^2+40/1.1^3+215/1.1^4+215/1.1^5
=$379.82
NPV=Present value of inflowsPresent value of outflows
=(379.82350)
=$29.82
Project 2:
Present value of inflows=200/1.1+200/1.1^2+70/1.1^3+70/1.1^4+70/1.1^5
=$490.97
NPV =$490.97$650
=($159.03)(Negative)
Hence Project 1 must be selected having positive and higher NPV.
Hence the correct option is A.
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