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

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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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Oct 14, 2020

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