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    Choosing from two mutually exclusive projects

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    As the capital budgeting director for Denver Corporation, you are evaluating two mutually exclusive projects with the following net cash flows:

    Project X Project Z
    Year Cash Flow Cash Flow
    0 -$100,000 -$100,000
    1 50,000 10,000
    2 40,000 30,000
    3 30,000 40,000
    4 10,000 60,000

    If Denver's WACC is 15%, which project would you choose?
    A Neither project.
    B Project X, since it has the higher IRR.
    C Project Z, since it has the higher NPV.
    D Project X, since it has the higher NPV.
    E Project Z, since it has the higher IRR

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    Solution Preview

    Please refer attached file for better understanding of formulas.

    PV of a cash flow=FV/(1+r)^n
    FV= Future cash flow
    r=interest rate
    n= period

    Project X
    Year End Cash flows PV ...

    Solution Summary

    Solution describes the steps for choosing a project from given two mutually exclusive projects by NPV method.