11-10 CAPITAL BUDGETING CRITERIA: MUTUALLY EXCLUSIVE PROJECTS A firm with a WACC of 10% is considering the following mutually exclusive projects: 1 3 4 + $190 $125 + + Project 1 Project 2 + $75 $125 -$200 $75 $250 $75 $250 $190 $125 - $650 Which project would you recommend? Explain.
11-10 CAPITAL BUDGETING CRITERIA: MUTUALLY EXCLUSIVE PROJECTS A firm with a WACC of 10% is considering the following mutually exclusive projects: 1 3 4 + $190 $125 + + Project 1 Project 2 + $75 $125 -$200 $75 $250 $75 $250 $190 $125 - $650 Which project would you recommend? Explain.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Please show the solution on excel spreadsheet and please indicate the formulas used. Thank you.
Transcribed Image Text:**Capital Budgeting Criteria: Mutually Exclusive Projects**
A firm with a Weighted Average Cost of Capital (WACC) of 10% is evaluating the following mutually exclusive projects:
- **Time Period (Years):** 0, 1, 2, 3, 4, 5
- **Project 1 Cash Flows ($):** -200, 75, 75, 75, 190, 190
- **Project 2 Cash Flows ($):** -650, 250, 250, 125, 125, 125
**Cash Flow Diagram Explanation:**
The diagram illustrates the cash flow timeline for two projects over a five-year period. Both projects require an initial outlay at Year 0, followed by expected cash inflows in subsequent years.
- **Project 1** begins with an initial investment of $200 (negative cash flow), followed by steady annual inflows of $75 in Years 1 through 3, and larger inflows of $190 in Years 4 and 5.
- **Project 2** has a larger initial investment of $650 and higher inflows of $250 in Years 1 and 2, followed by smaller inflows of $125 from Years 3 to 5.
**Question:** Which project would you recommend? Explain your rationale considering factors like net present value (NPV), internal rate of return (IRR), and payback period, taking into account the WACC of 10%.
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