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    Mutually Exclusive Projects and Net Cash Flow

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    4. The director of capital budgeting for Giant Company Inc. has identified two mutually exclusive projects, L and S, with the following expected net cash flows:

    Expected Net Cash Flows
    Year Project L Project S

    0 ($200) ($200)
    1 20 140
    2 120 100
    3 160 40

    Both projects have a cost of capital of 10 percent. Which project should be selected?

    a. Project L b. Project S

    5. What is the payback period for Project S in question 4?

    6. What is Project L's NPV in question 5?

    7. What is Project L's IRR?

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    Solution Preview

    4. We select the project based on the NPV(since the projects are mutually exclusive we cannot choose both). The project with the higher NPV should be selected.
    NPV is calculated as PV of inflows - initial investment
    NPV for Project L is
    20/1.1 + 120/1.1^2 + ...

    Solution Summary

    The solution explains the evaluation of two mutually exclusive projects.