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# Capital budgeting criteria: mutually exclusive projects Project S costs \$11,000 and its expected cash flows would...

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?

 I. Neither S or L, since each project's NPV < 0.
 II. Project L, since the NPVL > NPVS.
 III. Project S, since the NPVS > NPVL.
 IV. Both Projects S and L, since both projects have IRR's > 0.
 V. Both Projects S and L, since both projects have NPV's > 0.

 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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