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Your boss is deciding between two projects. The two projects are mutually exclusive, equally risky, and not repeatable. Their cash flows are shown below. Wilma
Your boss is deciding between two projects. The two projects are mutually exclusive, equally risky, and not repeatable. Their cash flows are shown below. Wilma thinks the IRR is the best selection criterion, but Wilbur is arguing for 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?
Cost of capital 8.25% | |||||
Year | 0 | 1 | 2 | 3 | 4 |
Cfu | -2225 | 1100 | 1200 | 200 | 200 |
Cfa | -5400 | 1300 | 4450 | 1600 | 2800 |
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