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**CFA Practice Question**

Beaumont Bearings is analyzing two mutually exclusive projects with the following cash flows. Its cost of capital is 9%.

Which project(s) should Beaumont choose?

A. Project X

B. Project Y

C. Both

**Explanation:**When choosing among mutually exclusive projects, a company should go with the NPV criterion. In this case, project X has a higher NPV (6,320) than project Y (5,648). The IRR method should not be relied upon for such projects.

NPV

_{X}= -10,000 + 8,000/(1.09)

^{1}+ 7,000/(1.09)

^{2}+ 4,000/(1.09)

^{3}= 6,320

NPV

_{Y}= -5,000 + 3,000/(1.09)

^{1}+ 2,500/(1.09)

^{2}+ 7,500/(1.09)

^{3}= 5,648

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**User Contributed Comments**
7

User |
Comment |
---|---|

smillis |
Why not both projects? They are both NPV positive and there is no constraint on dollars spent? |

angy557 |
smillis, mutually exclusive means they can only choose one project. X has higher NPV |

mc01 |
these calculations are not hard so the only way to get us to make a mistake is by expecting us not to properly read these questions. |

makatang |
damn it! missed the mutually exclusive :( |

harpalani |
Another way of looking at it: I would choose project X because it returns higher cash flows in earlier years as compared to project Y. Project Y returns higher cash flows in only in later years. |

MaresaJaden |
Harpalani, I don't think you would necessarily know that X as the answer due to the initial cash outlay of project X being double that of Project Y. |

ecapocas |
You can eyeball this. Note WACC is relatively high, and X has both a greater scale AND cash flow returns are front loaded. |