CAPITAL BUDGETING CRITERIA: MUTUALLY EXCLUSIVE PROJECTS Project S costs $17,000, and its expected cash flows would be $5,000 per year for 5 years. Mutually exclusive Project L costs $30,000, and its expected cash flows would be $8,750 per year for 5 years. If both projects have a WACC of 12%, which project would you recommend? Explain. Which project would you recommend? Explain.
S:
Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)
=5000/1.12+5000/1.12^2+5000/1.12^3+5000/1.12^4+5000/1.12^5
=18023.88
NPV=Present value of inflows-Present value of outflows
=18023.88-17000
=$1023.88(Approx)
L:
Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)
=8,750/1.12+8,750/1.12^2+8,750/1.12^3+8,750/1.12^4+8,750/1.12^5
=31541.79
NPV=Present value of inflows-Present value of outflows
=31541.79-30,000
=$1541.79(Approx)
Hence since projects are mutually exclusive;project L must be selected only having higher NPV.
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