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Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937

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Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937
Textbook Problem
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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.

Summary Introduction

To explain: Whether the Project S or Project L should be chosen.

Introduction:

Mutually Exclusive Projects:

It refers to the group of projects in which if one project is accepted it will automatically imply the rejection of the other projects. It refers to those projects for which the investment cannot be made together.

Explanation

Given information:

Cost of the Project S is $17,000.

Cost of Project L is $30,000.

Life of Project S is 5 years.

Life of Project L is 5 years.

Cash inflow per year from Project S is $5,000.

Cash inflow per year from Project L is $8,750.

Cost of capital of Project S and L is 12%.

The calculation of NPV for Project S in spreadsheet is:

Table (1)

The NPV of Project S is $1,023.88.

The calculation of NPV for Project L in spreadsheet is:

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