Question

# Project S costs \$16,000 and its expected cash flows would be \$4,000 per year for 5...

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?

 a. Neither Project S nor L, since each project's NPV < 0.
 b. Both Projects S and L, since both projects have IRR's > 0.
 c. Project S, since the NPVS > NPVL.
 d. Project L, since the NPVL > NPVS.

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 inflows-Present 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 inflows-Present 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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