Question

# CAPITAL BUDGETING CRITERIA: MUTUALLY EXCLUSIVE PROJECTS Project S costs \$17,000, and its expected cash flows would...

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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