Question
Michaels Inc.'s CEO thinks the company should rely primarily on the NPV method, but the president prefers the IRR, so decisions are based on the
Michaels Inc.'s CEO thinks the company should rely primarily on the NPV method, but the president prefers the IRR, so decisions are based on the IRR. The CFO wants you to show the president that at times decisions based on the IRR result in a reduction in the company's value relative to its value if the NPV criterion were used. The CFO then asked you to analyze two projects that the company is now considering, S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the higher IRR, how much value will Ross be foregoing?
WACC = 10%
Year: | 0 | 1 | 2 | 3 | 4 |
CFS: | -$1,025 | $493 | $493 | $493 | |
CFL: | -$1,025 | $400 | $400 | $400 | $400 |
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started