Ch 11- End-of-Chapter Problems - The Basics of Capital Budgeting

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3. Problem 11.10 (Capital Budgeting Criteria: Mutually Exclusive Projects)

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A firm with a WACC of 10% is considering the following mutually exclusive projects:

0

1

2

+

$50

3

+

+

$50

$240

$350 $350 $140 $140

-$200 $50

Project 1

Project 2 -$650

Which project would you recommend?

5

1

$240

$140

Select the correct answer.

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

Ob. Project 2, since the NPV₂ > NPV₁.

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

Od. Project 1, since the NPV₁ > NPV₂.

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