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Capital Budgeting Criteria: Mutually Exclusive Projects Project S costs $17,000, and its expected cash flows would be $5,000 per year for 5 years. Mutually exclusive Project L costs $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.

Respuesta :

Zviko

Answer:

Recommend Project L.Project L has the Highest Net Present Value

Explanation:

We will determine the best project to choose using the Net Present Value Method of Capital Appraisal.

This is the Method possible because the information provided consist of Cash flows, Same Period for Both Projects and the Same Weighted Average  Cost of Capital is Provided.

Calculation of Net Present Value of the Projects is as follows :

Project S

Year       Financial Calculator                  Cash flows

0                         Cf 0                                   ($17,000)

1                          Cf 1                                     $5,000

2                         Cf 2                                    $5,000

3                         Cf 3                                    $5,000

4                         Cf 4                                    $5,000

5                         Cf 5                                   $5,000

Cost of Capital = 12%

NPV = 1, 023.88

Project L

Year       Financial Calculator                  Cash flows

0                         Cf 0                                  ($30,000)

1                          Cf 1                                     $8,750

2                         Cf 2                                    $8,750

3                         Cf 3                                    $8,750

4                         Cf 4                                    $8,750

5                         Cf 5                                   $8,750

Cost of Capital = 12%

NPV = 1,541.79

The best project is the one the the highest Net Present Value

Project L has the highest Present Value of $ 1,541.79. Thus, i would recommend Project L

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