Capital budgeting criteria: mutually exclusive projects
Project S costs $11,000 and its expected cash flows would be $4,000 per year for 5 years. Mutually exclusive Project L costs $32,000 and its expected cash flows would be $14,700 per year for 5 years. If both projects have a WACC of 15%, which project would you recommend?
Select the correct answer.









Sloution :  
i)  Evaluation of project "S"  
Present value of cash inflows  =Annual equal cash inflows *PVIFA (PIR,n)  
=$4000*PVIFA(15%,5)  
=$4000*3.352155  
=$13408.62  
Note:  PIR=peridice interest rate  
n= no of years  
NPV of project "S"  =Present value of cash inflows  present value of outflows  
=$13408.62$11000  
=$2408.62  
ii)  Evaluation of project "L"  
Present value of cash inflows  =Annual equal cash inflows *PVIFA (PIR,n)  
=$14700*PVIFA(15%,5)  
=$14700*3.352155  
=$49276.68  
Note:  PIR=peridice interest rate  
n= no of years  
NPV of project "L"  =Present value of cash inflows  present value of outflows  
=$49276.68$32000  
=$17,276.68  
Since the projects are mutually exclusive hence project "L" should be selected since NPVL>NPVS, hence the correct choice would be "ii" 
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