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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 |
year CFs
0
1
2
3
4 Rate
NPV
IRR $ CFL
-1025
380
380
380
380 -2150
765
765
765
765 6% 6% 291.74 $
17.86% 500.81
15.78% I would go with NPV decision rule as NPV is a more accurate method of analyzing...
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Solution #00070308
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DATE ANSWEREDOct 14, 2020
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