Question

Project S costs $15,000 and its expected cash flows would be $4,000 per year for 5 years. Mutually exclusive Project L costs $36,000 and its expected cash flows would be $13,400 per year for 5 years. If both projects have a WACC of 16%, which project would you recommend?

Select the correct answer.

I. Project L, since the NPVL > NPVS.

II. Project S, since the NPVS > NPVL.

III. Neither S or L, since each project's NPV < 0.

IV. Both Projects S and L, since both projects have NPV's > 0.

V. Both Projects S and L, since both projects have IRR's > 0.

Answer 1

NPVL

Year	0	1	2	3	4	5
Initial Investment	-36,000
Sales Revenue		13,400	13,400	13,400	13,400	13,400
PV of Net Cash Flow	-36,000	11,552	9,958	8,585	7,401	6,380
WACC	16%
NPV	7,876

NPVS

Year	0	1	2	3	4	5
Initial Investment	-15,000
Sales Revenue		4,000	4,000	4,000	4,000	4,000
PV of Net Cash Flow	-15,000	3,448	2,973	2,563	2,209	1,904
WACC	16%
NPV	-1,903

Option I is correct

NPVL > NPVS

Moreover, NPVS < 0

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