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A firm with a WACC of 10% is considering the following mutually exclusive projects: 0 1...

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Finance

A firm with a WACC of 10% is considering the following mutuallyexclusive projects: 0 1 2 3 4 5 Project 1 -$200 $40 $40 $40 $235$235 Project 2 -$450 $200 $200 $80 $80 $80 Which project would yourecommend? Select the correct answer.

a. Both Projects 1 and 2, since both projects have IRR's >0.

b. Neither Project 1 nor 2, since each project's NPV < 0.

c. Both Projects 1 and 2, since both projects have NPV's >0.

d. Project 2, since the NPV2 > NPV1.

e. Project 1, since the NPV1 > NPV2.

Answer & Explanation Solved by verified expert
4.1 Ratings (702 Votes)

Ans e. Project 1, since the NPV1 > NPV2.

PROJECT 1
Year Project Cash Flows (i) DF@ 10% DF@ 10% (ii) PV of Project ( (i) * (ii) )
0 -200 1 1                         (200.00)
1 40 1/((1+10%)^1) 0.909                             36.36
2 40 1/((1+10%)^2) 0.826                             33.06
3 40 1/((1+10%)^3) 0.751                             30.05
4 235 1/((1+10%)^4) 0.683                           160.51
5 235 1/((1+10%)^5) 0.621                           145.92
NPV                           205.90
PROJECT 2
Year Project Cash Flows (i) DF@ 10% DF@ 10% (ii) PV of Project ( (i) * (ii) )
0 -450 1 1                         (450.00)
1 200 1/((1+10%)^1) 0.909                           181.82
2 200 1/((1+10%)^2) 0.826                           165.29
3 80 1/((1+10%)^3) 0.751                             60.11
4 80 1/((1+10%)^4) 0.683                             54.64
5 80 1/((1+10%)^5) 0.621                             49.67
NPV                             61.53

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Transcribed Image Text

A firm with a WACC of 10% is considering the following mutuallyexclusive projects: 0 1 2 3 4 5 Project 1 -$200 $40 $40 $40 $235$235 Project 2 -$450 $200 $200 $80 $80 $80 Which project would yourecommend? Select the correct answer.a. Both Projects 1 and 2, since both projects have IRR's >0.b. Neither Project 1 nor 2, since each project's NPV < 0.c. Both Projects 1 and 2, since both projects have NPV's >0.d. Project 2, since the NPV2 > NPV1.e. Project 1, since the NPV1 > NPV2.

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