Question

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

0

1

2

3

4

5

Project 1	-$450	$40	$40	$40	$165	$165
Project 2	-$450	$350	$350	$110	$110	$110

Which project would you recommend?

Select the correct answer.

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

b. Project 2, since the NPV2 > NPV1.

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

d. Project 1, since the NPV1 > NPV2.

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

Answer 1

Answer - Option b. Project 2, since the NPV₂ > NPV₁.

А В с Year Project A (Cf) Project B (Cf) O ($450) ($450) 1 $40 $350 $40 $350 $40 $165 $110 - 5 $165 $110 $110 9 WACC 10 NPV 11 10% ($135.38) $383.52

B. Year Project A (Cf) Project B (Cf) 4. 2 -450 40 40 40 165 165 -450 350 350 110 110 110 5 3 6 4 7 5 9 WACC 10 NPV 0.1 =NPV($B$9,B3:B7)+B2 NPV($B$9,C3:C7)+C2 13