Question
Kelly Fruit is considering two project, S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable.
Kelly Fruit is considering two project, S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. The CEO believes the IRR is the best selection criterion, while the CFO advocates 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?
Hint:
1) estimate the IRR for each project
2) estimate the NPV for each project for given cost of capital.
3) Compare the NPV for the two projects.
You can use the included template to work out the solution.
_fmu_test3b_template.xlsx
discount rate = wacc | 7.50% | 7.50% |
year | CF_S | CF_L |
0 | -1100 | -2700 |
1 | 550 | 650 |
2 | 600 | 725 |
3 | 100 | 800 |
4 | 200 | 1400 |
IRR | ?? | ?? |
Pv of future cash flow | ?? | ?? |
Initial investment | ?? | ?? |
Net present value | ?? | ?? |
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