Capital budgeting criteria: mutually exclusive projects
Project S costs $15,000 and its expected cash flows would be $5,500 per year for 5 years. Mutually exclusive Project L costs $40,500 and its expected cash flows would be $10,800 per year for 5 years. If both projects have a WACC of 15%, which project would you recommend?
Select the correct answer.









S:
Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)
=5500/1.15+5500/1.15^2+5500/1.15^3+5500/1.15^4+5500/1.15^5
=18436.85
NPV=Present value of inflowsPresent value of outflows
=18436.8515000
=$3436.85(Approx)
L:
Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)
=10800/1.15+10800/1.15^2+10800/1.15^3+10800/1.15^4+10800/1.15^5
=36203.28
NPV=Present value of inflowsPresent value of outflows
=36203.2840500
=4296.72(Approx)(Negative)
Hence project S must be selected having higher and positive NPV.
Hence the correct option is:
Project S, since the NPV_{S} > NPV_{L}
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