Asked by DVick 3 years ago

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

Answered by moduloP 3 years ago

**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**

**Excerpt from file: **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

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