Problem 11-10 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	$225	$225
Project 2	-$400	$300	$300	$80	$80	$80

Which project would you recommend?

Select the correct answer.

I. Project 1, since the NPV1 > NPV2.

II. Neither A or B, since each project's NPV < 0.

III. Project 2, since the NPV2 > NPV1.

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

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