Question

Capital budgeting criteria: mutually exclusive projects A firm with a WACC of 10% is considering the following mutually exclusive projects: 0 1 2 3 4 5 Project A -$250 $80 $80 $80 $215 $215 Project B -$550 $350 $350 $40 $40 $40 Which project would you recommend? Select the correct answer. I. Project A, since the NPVA > NPVB. II. Neither A or B, since each project's NPV < 0. III. Project B, since the NPVB > NPVA. IV. Both Projects A and B, since both projects have NPV's > 0. V. Both Projects A and B, since both projects have IRR's > 0.

Answer 1

step 1: Calculation of each project's NPV

-Project A

Year	0	1	2	3	4	5
Interest Rate	10%	10%	10%	10%	10%	10%
Cashflow(in $)	-250	80	80	80	215	215
Present Value ($)	(250.00)	72.73	66.12	60.11	146.85	133.50

NPV= $229.29 (72.73+66.12+60.11+146.85+133.50-250)

-Project B

Year	0	1	2	3	4	5
Interest Rate	10%	10%	10%	10%	10%	10%
Cashflow(in $)	-550	350	350	40	40	40
Present Value ($)	(550.00)	318.18	289.26	30.05	27.32	24.84

NPV = $139.65 (318.18+289.26+30.05+27.32+24.84-550)

Formula to calculate PV in excel is as follows

"=PV(interest rate,Year,0,cashflow)"

You can use the equation Cashflow * 1/(1+i)ⁿ to find present value using calculator

Analysis: Since the projects are mutually exclusive,only one project can be selected. So select Project A since it has higher NPV.