Problem 11-11 Capital budgeting criteria: mutually exclusive projects

Project S costs $16,000 and its expected cash flows would be $7,000 per year for 5 years. Mutually exclusive Project L costs $37,000 and its expected cash flows would be $11,300 per year for 5 years. If both projects have a WACC of 12%, which project would you recommend?

Select the correct answer.

I. Project L, since the NPVL > NPVS.

II. Both Projects S and L, since both projects have NPV's > 0.

III. Project S, since the NPVS > NPVL.

IV. Neither S or L, since each project's NPV < 0.

V. Both Projects S and L, since both projects have IRR's > 0.