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Capital Decisions 3) Complete the following problem. Walk through your calculations and your recommendation to the CEO for acceptance/rection of projects. A firm is considering
Capital Decisions 3) Complete the following problem. Walk through your calculations and your recommendation to the CEO for acceptance/rection of projects. 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? Project S Project L WACC 6.55% 6.55% Initial Cost ($1,100 ($2100) Year 1 $405 $720 Year 2 $405 $720 Year 3 $405 $720 Year 4 $405 $720 At which rate would the projects cross over, meaning their NPVs would be the same? (If you complete the video for this question, you may include the bonus in your video as an option)
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