Project S costs $14,000 and its expected cash flows would be $6,500 per year for 5 years. Mutually exclusive Project L costs $37,500 and its expected cash flows would be $14,700 per year for 5 years. If both projects have a WACC of 13%, which project would you recommend?









The NPV is computed as shown below:
= Initial investment + Present value of future cash flows
Present value is computed as follows:
= Future value / (1 + r)^{n}
The NPV of Project S is computed as follows:
=  $ 14,000 + $ 6,500 / 1.13^{1} + $ 6,500 / 1.13^{2} + $ 6,500 / 1.13^{3} + $ 6,500 / 1.13^{4} + $ 6,500 / 1.13^{5}
= $ 8,862 Approximately
The NPV of Project L is computed as follows:
=  $ 37,500 + $ 14,700 / 1.13^{1} + $ 14,700 / 1.13^{2} + $ 14,700 / 1.13^{3} + $ 14,700 / 1.13^{4} + $ 14,700 / 1.13^{5}
= $ 14,203 Approximately
Since these two projects are mutually exclusive, hence we need to select the one which has the higher NPV. Since the NPV of project L is greater than the NPV of project S, hence Project L shall be accepted.
So, the correct answer is option a.
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