12-2: Net Present Value (NPV)

Capital budgeting criteria: mutually exclusive projects

Project S costs $12,000 and its expected cash flows would be $6,500 per year for 5 years. Mutually exclusive Project L costs $40,500 and its expected cash flows would be $13,100 per year for 5 years. If both projects have a WACC of 13%, which project would you recommend?

Select the correct answer.

I. Project L, since the NPVL > NPVS.

II. Both Projects S and L, since both projects have IRR's > 0.

III. Project S, since the NPVS > NPVL.

IV. Both Projects S and L, since both projects have NPV's > 0.

V. Neither S or L, since each project's NPV < 0.