Question

9.  Problem 11.10 (Capital Budgeting Criteria: Mutually Exclusive Projects)

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A firm with a WACC of 10% is considering the following mutually exclusive projects:

0

1

2

3

4

5

Project 1	-$300	$65	$65	$65	$230	$230
Project 2	-$550	$200	$200	$135	$135	$135

Which project would you recommend?

Select the correct answer.

a. Neither Project 1 nor 2, since each project's NPV < 0.

b. Both Projects 1 and 2, since both projects have IRR's > 0.

c. Both Projects 1 and 2, since both projects have NPV's > 0.

d. Project 2, since the NPV2 > NPV1.

e. Project 1, since the NPV1 > NPV2.

Answer 1

Please rate positively ..

a	Project 1	($300)	$65	$65	$65	$230	$230
b	Project 2	($550)	$200	$200	$135	$135	$135
c	PVIF @ 11.1%	1	0.90009	0.810162	0.729219	0.656363	0.590785
d=a*c	Present value project 1	($300)	$59	$53	$47	$151	$136	$145
e=b*c	Present value project 2	($550)	$180	$162	$98	$89	$80	$59
	Since projects are mutually exclusive therefore only 1 project can be selected.
	NPV of project 1 is 145 which is higher than compared to project 2
	therefore project 1 will be selected .
	Correct answer is option :			e. Project 1, since the NPV1 > NPV2.