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
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. Based on the IRR criterion and the NPV criterion, which project should be selected?
Required return: 6.00%
| Year | 0 | 1 | 2 | 3 | 4 |
| Cash flows of Project S | -$1,055 | $400 | $400 | $400 | $400 |
| Cash flows of Project L | -$2,050 | $700 | $700 | $700 | $700 |
| IRR criterion - Project S; NPV criterion - Project L | ||
| IRR criterion - Project S; NPV criterion - Project S | ||
| IRR criterion - Project L; NPV criterion - Project L | ||
| IRR criterion - Project L; NPV criterion - Project S | ||
| IRR criterion - Project S or Project L; NPV criterion - Project S or Project L |
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