8.

CAPITAL BUDGETING CRITERIA: MUTUALLY EXCLUSIVE PROJECTS

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

0

1

2

3

4

5

Project 1	-$400	$70	$70	$70	$210	$210
Project 2	-$400	$300	$300	$80	$80	$80

Which project would you recommend?

Select the correct answer.

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

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

c. Project 2, since the NPV2 > NPV1.

d. Project 1, since the NPV1 > NPV2.

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