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	-$200	$70	$70	$70	$200	$200
Project 2	-$550	$350	$350	$55	$55	$55

Which project would you recommend?

Select the correct answer.

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

{C}

b. Project 1, since the NPV1 > NPV2.

{C}

c. Project 2, since the NPV2 > NPV1.

{C}

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

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