Project S costs $16,000 and its expected cash flows would be $4,000 per year for 5 years. Mutually exclusive Project L costs $29,500 and its expected cash flows would be $9,300 per year for 5 years. If both projects have a WACC of 14%, which project would you recommend?
Select the correct answer.








S:
Present value of annuity=Annuity[1(1+interest rate)^time period]/rate
=$4000[1(1.14)^5]/0.14
=$4000*3.433080969
=$13732.32
NPV=Present value of inflowsPresent value of outflows
=$13732.32$16000
=($2267.68)(Approx)(Negative).
L:
Present value of annuity=Annuity[1(1+interest rate)^time period]/rate
=$9300[1(1.14)^5]/0.14
=$9300*3.433080969
=$31927.65
NPV=Present value of inflowsPresent value of outflows
=$31927.65$29500
=$2427.65(Approx).
Hence L must be selected only having a positive and higher NPV.(Option D).
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