Question

Capital budgeting criteria: mutually exclusive projects Project S costs $12,000 and its expected cash flows would be $4,500 per year for 5 years. Mutually exclusive Project L costs $49,000 and its expected cash flows would be $12,900 per year for 5 years. If both projects have a WACC of 14%, which project would you recommend? Select the correct answer. I. Project L, since the NPVL > NPVS. II. Both Projects S and L, since both projects have NPV's > 0. III. Neither S or L, since each project's NPV < 0. IV. Project S, since the NPVS > NPVL. V. Both Projects S and L, since both projects have IRR's > 0

Answer 1

NPV of both project is calculated in excel and screen shot provided below:

NPV of project S is $3,448.86 and NPV of project L is -$4,713.26.

Since, NPV of project S is higher than NPV of project L. So, based on NPV, Project S should be accepted.

So, Option (IV) is correct answer.