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 1 -$200 $60 $60 $60 $225 $225 Project 2 -$500 $200 $200 $50 $50 $50 Which project would you recommend? Select the correct answer. I. Project 1, since the NPV1 > NPV2. II. Neither A or B, since each project's NPV < 0. III. Both Projects 1 and 2, since both projects have IRR's > 0. IV. Both Projects 1 and 2, since both projects have NPV's > 0. V. Project 2, since the NPV2 > NPV1.
1:
Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)
=60/1.1+60/1.1^2+60/1.1^3+225/1.1^4+225/1.1^5
=$442.60
NPV=Present value of inflows-Present value of outflows
=$442.60-$200
=$242.60(Approx).
2:
Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)
=200/1.1+200/1.1^2+50/1.1^3+50/1.1^4+50/1.1^5
=$449.87
NPV=Present value of inflows-Present value of outflows
=$449.87-$500
=$(50.13)(Approx).(Negative)
Hence project 1 must be selected having higher NPV(Option 1).
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