Question
A company is deciding between two projects, U and A. The two projects are mutually exclusive, equally risky, and not repeatable. Their cash flows are
A company is deciding between two projects, U and A. The two projects are mutually exclusive, equally risky, and not repeatable. Their cash flows are shown below. The CEO thinks that IRR is the best selection criterion, but the CFO is arguing for the NPV. If the decision is made by choosing the project with the higher IRR rather than the one with the higher NPV, how much, if any, value will be forgone, i.e., what's the chosen NPV versus the maximum possible NPV?
Cost of capital= 8.25%
Year 0 1 2 3 4
CFu -$2,225 $1,100 $1,200 $200 $200
CFa -$5,400 $1,300 $1,450 $1,600 $2,800
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