A firm is considering Projects S and L, whose cash flows are shown below. These

Question

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?

Question 42 options:

$166.73

$157.30

$168.31

$136.85

$152.58

WACC: 7.75% 0 1 2 3 4 CFS -$1,025 $380 $380 $380 $380 CFL -$2,150 $765 $765 $765 $765

Explanation / Answer

NPV Method CFS NPV = Cash Inflows- Cash Outflows NPV = 380*3.33-1025   = $ 240.65 CFL= 765*3.33-2150 = $ 397.94 Potential Value 397.94-240.65 = $ 157.30 The correct answer is $ 157.30

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