Question

11-2: Net Present Value (NPV) Capital budgeting criteria: mutually exclusive projects Project Scosts $13,000 and its expected cash flows would be $4,500 per year for 5 years. Mutually exclusive Project L costs $36,500 and its expected cash flows would be $8,100 per year for 5 years. If both projects have a WACC of 15%, which project would you recommend? Select the correct answer. O I. Both Projects S and L, since both projects have IRR's > 0. O II. Project L, since the NPVL > NPVS. O III. Project S, since the NPVS > NPVL- O IV. Neither Sor L, since each project's NPV < 0. O V. Both Projects S and L, since both projects have NPV's > 0.

Answer 1

Answer: Option III is correct. Project S should be selected since NPV of project S > NPV of project L

1 Year Projects Project L -13000 -36500 4500 8100 4500 8100 4500 8100 4500 8100 4500 8100 NPV= 2084.70 -9347.54 9 Formula used: B2+NPV(15%,B3:37) C2+NPV(15%,C3:07) 8 N

So, the NPV of project S is positive and the NPV of project L is negative

Mutually exclusive projects are a set of projects out of which only one project should be selected.

In this case, the project with project with positive NPV should be selected.

So, project S should be selected