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Problem 11-11
Capital budgeting criteria: mutually exclusive projects
Project S costs $12,000 and its expected cash flows would be $6,000 per year for 5 years.
Mutually exclusive Project L costs $38,500 and its expected cash flows would be $9,300 per
year for 5 years. If both projects have a WACC of 12%, which project would you recommend?
Select the correct answer.I. Project S, since the NPVS > NPVL.II. Neither S or L, since each
project's NPV < 0.III. Both Projects S and L, since both projects have IRR's > 0.IV. Project L,
since the NPVL > NPVS.V. Both Projects S and L, since both projects have NPV's > 0.
Solution
Project S should be selected as NPVS > NPVLProject SyearCash flowsPVF @ 12%PV0-
120001-
12000160000.8935358260000.7974782360000.7124272460000.6363816560000.56734029630P
roject LyearCash flowsPVF @ 12%PV0-385001-
38500193000.8938304.9293000.7977412.1393000.7126621.6493000.6365914.8593000.567527
3.1-4973.5

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Problem 11-11 Capital budgeting criteria mutually exclusive pro.pdf

  • 1. Problem 11-11 Capital budgeting criteria: mutually exclusive projects Project S costs $12,000 and its expected cash flows would be $6,000 per year for 5 years. Mutually exclusive Project L costs $38,500 and its expected cash flows would be $9,300 per year for 5 years. If both projects have a WACC of 12%, which project would you recommend? Select the correct answer.I. Project S, since the NPVS > NPVL.II. Neither S or L, since each project's NPV < 0.III. Both Projects S and L, since both projects have IRR's > 0.IV. Project L, since the NPVL > NPVS.V. Both Projects S and L, since both projects have NPV's > 0. Solution Project S should be selected as NPVS > NPVLProject SyearCash flowsPVF @ 12%PV0- 120001- 12000160000.8935358260000.7974782360000.7124272460000.6363816560000.56734029630P roject LyearCash flowsPVF @ 12%PV0-385001- 38500193000.8938304.9293000.7977412.1393000.7126621.6493000.6365914.8593000.567527 3.1-4973.5