Question

A firm with a WACC of 10% is considering the following mutually exclusive projects: o 1 2 3 4 5 Project 1 Project 2 -$200 -$700 $75 $350 $75 $350 $75 $100 $230 $100 $230 $100 Which project would you recommend? Select the correct answer. a. Both Projects 1 and 2, since both projects have NPV's > 0. Ob. Project 2, since the NPV2 > NPV1. Oc. Neither Project 1 nor 2, since each project's NPV < 0. O d. Project 1, since the NPV1 > NPV2. Oe. Both Projects 1 and 2, since both projects have IRR's > 0.

Answer 1

Project 1
Discount rate	0.1
Year	0	1	2	3	4	5
Cash flow stream	-200	75	75	75	230	230
Discounting factor	1	1.1	1.21	1.331	1.4641	1.61051
Discounted cash flows project	-200	68.18182	61.98347	56.34861	157.09309	142.8119
NPV = Sum of discounted cash flows
NPV Project 1 =	286.42
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
Project 2
Discount rate	0.1
Year	0	1	2	3	4	5
Cash flow stream	-700	350	350	100	100	100
Discounting factor	1	1.1	1.21	1.331	1.4641	1.61051
Discounted cash flows project	-700	318.1818	289.2562	75.13148	68.301346	62.09213
NPV = Sum of discounted cash flows
NPV Project 2 =	112.96
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

d. Project 1, since the NPV1 > NPV2.