Question
You arrived at work today to see the CFO, COO and most of the companys top management team taken away in handcuffs. The only executive
- You arrived at work today to see the CFO, COO and most of the companys top management team taken away in handcuffs. The only executive who was not arrested was the newly appointed CEO. Before you can even reach your cube, the CEO calls you into his office to explain some incomplete project analysis left on the CFOs desk. Below are the two mutually exclusive projects under consideration.
| Year | Project A | Project B |
| 0 | (171,000.00) | (198,000.00) |
| 1 | 46,000.00 | 55,000.00 |
| 2 | 79,000.00 | 34,000.00 |
| 3 | 51,000.00 | 120,000.00 |
| 4 | 65,000.00 | 25,000.00 |
| 5 | 23,000.00 | 75,000.00 |
| IRR | 17.82% | 16.22% |
While a marketing genius, the CEO has very little experience in finance, and would like to simply choose Project A because it earns a higher return for the company.
- Explain (in words and graphically) why the CEOs reasoning could be flawed.(2.5)
- If your firm has a cost of capital of 8%, how much value will the firm lose out on by choosing the project with the highest IRR?(5)
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
Finance Applications and Theory
Authors: Marcia Cornett, Troy Adair
3rd edition
1259252221, 007786168X, 9781259252228, 978-0077861681
