Question

CAPITAL BUDGETING CRITERIA: MUTUALLY EXCLUSIVE PROJECTS Project S requires an initial outlay at t = 0 of $17,000, and its expected cash flows would be $5,000 per year for 5 years. Mutually exclusive Project L requires an initial outlay at t = 0 of $30,000, and its expected cash flows would be $8,750 per year for 5 years. If both projects have a WACC of 12%, which project would you recommend? Explain.

Answer 1

NPV = PV of Cash Inflows - PV of Cash Outflows

Project S:

Year	CF	PVF @12%	Disc CF
0	$ -17,000.00	1.0000	$ -17,000.00
1	$    5,000.00	0.8929	$    4,464.29
2	$    5,000.00	0.7972	$    3,985.97
3	$    5,000.00	0.7118	$    3,558.90
4	$    5,000.00	0.6355	$    3,177.59
5	$    5,000.00	0.5674	$    2,837.13
NPV			$    1,023.88

Project L:

Year	CF	PVF @12%	Disc CF
0	$ -30,000.00	1.0000	$ -30,000.00
1	$    8,750.00	0.8929	$    7,812.50
2	$    8,750.00	0.7972	$    6,975.45
3	$    8,750.00	0.7118	$    6,228.08
4	$    8,750.00	0.6355	$    5,560.78
5	$    8,750.00	0.5674	$    4,964.98
NPV			$    1,541.79

Project L is selected as it has higher NPV