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	-$500	$45	$45	$45	$160	$160
Project 2	-$450	$300	$300	$60	$60	$60

Which project would you recommend? Select the correct answer.

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

b. Project 1, since the NPV1 > NPV2.

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

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

e. Project 2, since the NPV2 > NPV1.