(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  $500  $60  $60  $60  $235  $235 
Project 2  $600  $250  $250  $125  $125  $125 
(this graph should have the 0 over the 500 and 600, the 1 over the 60 and 250, the 2 over the 60 and 250. the 3 over the 60 and 125, the 4 over the 235 and 125, and the 5 over the 235 and 125.) (I hope this makes sense, it was hard to get the graph to upload properly. )
Which project would you recommend?
Select the correct answer.









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 1 is computed as follows:
=  $ 500 + $ 60 / 1.10^{1} + $ 60 / 1.10^{2} + $ 60 / 1.10^{3} + $ 235 / 1.10^{4} + $ 235 / 1.10^{5}
=  $ 44.36 Approximately
The NPV of Project 2 is computed as follows:
=  $ 600 + $ 250 / 1.10^{1} + $ 250 / 1.10^{2} + $ 125 / 1.10^{3} + $ 125 / 1.10^{4} + $ 125 / 1.10^{5}
= $ 90.79 Approximately
Since the NPV of project 2 is positive and greater than the NPV of project 1, hence project 2 shall be accepted.
So, the correct answer is option d.
Feel free to ask in case of any query relating to this question
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