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Question 14: A firm is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not
Question 14:
A firm is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable.
| r: | 6.00% |
|
|
|
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| Year | 0 | 1 | 2 | 3 | 4 |
| CFS | $1,025 | $380 | $380 | $380 | $380 |
| CFL | $2,150 | $765 | $765 | $765 | $765 |
The CEO wants to use the IRR criterion, while the CFO favors the NPV method.
You were hired to advise on the best procedure. If the wrong decision criterion is used, how much potential value would the firm lose?
(this question is very challenging. It is fine if you can figure out the solution.)
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