Question

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.

Answer #1

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.**

Capital budgeting criteria: mutually exclusive projects. Project
S costs $17,000 and its expected cash flow would be $5,000 per year
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expected cash flow would be $8,750 per year for 5 years. If both
projects have a WACC of 12%, which project would you recommend?
Explain.
**Show Work**

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10. Problem 11.11 (Capital Budgeting Criteria:
Mutually Exclusive Projects)
eBook
Project S costs $18,000 and its expected cash flows would be
$5,000 per year for 5 years. Mutually exclusive Project L costs
$39,500 and its expected cash flows would be $7,900 per year for 5
years. If both projects have a WACC of 12%, which project would you
recommend?
Select the correct answer.
a. Project S, since the NPVS >
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b. Both Projects S and L, since both projects have...

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