A firm is considering Projects S and L, whose cash flows are sho


Asked by 2 years ago
407.5k points

5. A firm is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. The CEO wants to use the IRR criterion, while the CFO favors the NPV method. You were hired to advise the firm on the best procedure. If the wrong decision criterion is used, how much potential value would the firm lose?

WACC: 6.00%

Year 0 1 2 3 4

CFS -\$1,025 \$380 \$380 \$380 \$380

CFL -\$2,150 \$765 \$765 \$765 \$765

a. $188.68

b. $198.61

c. $209.07

d. $219.52

e. $230.49

1 Answer

Answered by 2 years ago
380.4k points

WACC: 6.000%

Year 0 1 2 3 4
CFs -\$1,025 \$380 \$380 \$380 \$380
CFL -\$2,150 \$765 \$765 \$765 \$765
-\$1,125 \$385 \$385 \$385 \$385

Crossover rate = 13.86%

At interest rates < crossover rate, conflict exists.

IRRL: 15.781%

IRRS: 17.861%

NPVL: $500.81

NPVS: $291.74

209.07 = Value lost if use the IRR criterion

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