Question

0 of $17,000, and its expected cash flows would be $7,000 per year for 5 years. Mutually exclusive Project L requires Project S requires an initial outlay at t an initial outlay at t 0 of $37,000, and its expected cash flows would be $14,600 per year for 5 years. If both projects have a WACC of 12%, which project would you recommend? Select the correct answer a. Project s, since the NPVs > NPV O b. Project L, since the NPVL NPVs. O c. Both Projects S and L, since both projects have NPV's > 0. Od. Both Projects S and L, since both projects have IRR's > 0. O e. Neither Project S nor L, since each project's NPV < 0.

Answer 1

The NPV of project S is computed as shown below:

= - $ 17,000 + $ 7,000 / 1.12¹ + $ 7,000 / 1.12² + $ 7,000 / 1.12³ + $ 7,000 / 1.12⁴ + $ 7,000 / 1.12⁵

= $ 8,233.43 Approximately

The NPV of project L is computed as shown below:

= - $ 37,000 + $ 14,600 / 1.12¹ + $ 14,600 / 1.12² + $ 14,600 / 1.12³ + $ 14,600 / 1.12⁴ + $ 14,600 / 1.12⁵

= $ 15,629.73 Approximately

Since the projects are mutually exclusive, hence we shall accept project L since project L has a higher NPV.

So the correct answer is option b i.e. Project L, since the NPV of L > NPV of S