Project A and Project B are mutually exclusive projects being considered by a firm with a WACC of 10%. Project A has an NPV of -$7.14 while Project B has a higher NPV of $20.42. Therefore, the assistant recommends Project B since it has the highest NPV of the two options.

1. 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 A -$400 $40 $40 $40 $225 $225
Project B -$450 $200 $200 $60 $60 $60
Which project would you recommend? Select the correct answer. I. Neither A or B, since each
project's NPV < 0. II. Project A, since the NPVA > NPVB. III. Both Projects A and B, since
both projects have IRR's > 0. IV. Project B, since the NPVB > NPVA. V. Both Projects A and
B, since both projects have NPV's > 0.
Solution
Details Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Project A Cash Flows
(400) 40 40 40 225 225 Discount factor @10%
1.0000 0.9091 0.8264 0.7513 0.6830 0.6209 PV of Cash flows
(400.00) 36.36 33.06 30.05 153.68 139.71 NPV = (7.14)
Details Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Project B Cash Flows
(450) 200 200 60 60 60 Discount factor
@10% 1.0000 0.9091 0.8264 0.7513 0.6830 0.6209 PV of Cash
flows (450.00) 181.82 165.29 45.08 40.98 37.26 NPV =
20.42 I would recommend Project B as it has positive NPV which is greater than NPV
of Project A Option IV is correct.