Question

er 11 End-of-Chapter Problems Question 2 of 4 Check My Work (1 remaining) Problem 11-11 Capital budgeting criteria: mutually exclusive projects Project S costs $11,000 and its expected cash flows would be $4,500 per year for 5 years. Mutually exclusive Project L costs $35,000 and its expected $10.700 per year for 5 years. If both projects have a WACC of 14%, which project would you recommend Select the correct answer. 1. Both Projects 5 and L, since both projects have NPVS > 0 11. Project L, since the NPVL > NPVS. III. Both Projects S and L, since both projects have IRR'S > 0. IV. Nelther Sor L, since each project's NPV < 0. V. Project 5, since the NPVs > NPV. . Check My Work (1 remaining) O leon Key o e Ê © hp

Answer 1

V.Project S, since NPV of s > NPV. of L.

working:

first let us know the present value of annuity factor relevant.

for 5 years @14%.

present value of annuity factor = [1-(1+r)^(-n)]/r

here,

r =14%=>0.14.

n=5

=>[1-(1.14)^(-5)]/0.14

=>3.43308071.

now,

	project S	project L
present value of cash inflows (4,500*3.43308071) (10,700*3.43308071)	15,448.86	36,733.96
less: cash outflows	(11,000)	(35,000)
NPV	4,448.86	1,733.96

since NPV of S is high, this project shall be selected.