(Capital Budgeting Criteria: Mutually Exclusive Projects)
Project S costs $17,000 and its expected cash flows would be $4,500 per year for 5 years. Mutually exclusive Project L costs $28,500 and its expected cash flows would be $11,250 per year for 5 years. If both projects have a WACC of 15%, 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 S is computed as follows:
=  $ 17,000 + $ 4,500 / 1.15^{1} + $ 4,500 / 1.15^{2} + $ 4,500 / 1.15^{3} + $ 4,500 / 1.15^{4} + $ 4,500 / 1.15^{5}
=  $ 1,915.30 Approximately
The NPV of Project L is computed as follows:
=  $ 28,500 + $ 11,250 / 1.15^{1} + $ 11,250 / 1.15^{2} + $ 11,250 / 1.15^{3} + $ 11,250 / 1.15^{4} + $ 11,250 / 1.15^{5}
= $ 9,211.74 Approximately
Since the NPV of project L is positive and greater than the NPV of project S, hence project L shall be accepted.
So, the correct answer is option a.
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