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	-$450	$40	$40	$40	$235	$235
Project 2	-$500	$300	$300	$75	$75	$75

Which project would you recommend?

Select the correct answer.

a. Project 2, since the NPV2 > NPV1.

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

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

d. Project 1, since the NPV1 > NPV2.

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