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Project costs $13,000 and its expected cash flows would be $4,500 per year for 5 years
Project costs $13,000 and its expected cash flows would be $4,500 per year for 5 years. Mutually exclusive Project L costs $29,500 and its expected cash flows would be $12,600 per year for 5 years. If both projects have a WACC of 16%, which project would you recommend? Select the correct answer a. Both Projects Sand, since both projects have NPV's > 0 b. Both Projects 5 and L. since both projects have IRR'S > 0. O Project L since the NPV > NPVS d. Neither Project Snor, since each project's NPV NPV
Expert Solution
rate positively ..
| Present value | ||||||
| Year | Project S | Project L | PVIF @ 16% | Project S | Project L | |
| 0 | -13000 | -29500 | 1 | (13,000.00) | (29,500.00) | |
| 1 | 4500 | 12600 | 0.862069 | 3,879.31 | 10,862.07 | |
| 2 | 4500 | 12600 | 0.743163 | 3,344.23 | 9,363.85 | |
| 3 | 4500 | 12600 | 0.640658 | 2,882.96 | 8,072.29 | |
| 4 | 4500 | 12600 | 0.552291 | 2,485.31 | 6,958.87 | |
| 5 | 4500 | 12600 | 0.476113 | 2,142.51 | 5,999.02 | |
| NPV= | 1,734.32 | 11,756.10 | ||||
| Ans = option c) | ||||||
| Project L since the NPVL>NPVS |
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