Project S costs $15,000, and its expected cash flows would be $4,500 per year for 5 years. Mutually exclusive Project L costs $37,500, and its expected cash flows would be $11,100 per year for 5 years. If both projects have a WACC of 14%, which project(s) would be accepted?
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Hi
We will find the NPV for both the projects to select the project.
NPV for Project S = -15000 + 4500/(1+14%)^1 + 4500/(1+14%)^2+ 4500/(1+14%)^3+ 4500/(1+14%)^4+ 4500/(1+14%)^5
=-15000 + 3947.37 + 3462.60 + 3037.37 + 2664.36 + 2337.16
=$448.86
NPV for project L = -37500 + 11100/(1+14%)^1 + 11100/(1+14%)^2 + 11100/(1+14%)^3 + 11100/(1+14%)^4 + 11100/(1+14%)^5
=-37500 + 9736.84 + 8541.09 + 7492.18 + 6572.09 + 5764.99
=$607.20
Since both projects are having positive NPV hence option B is correct(Both projects should be selected.)
Thanks
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