Moerdyk & Co. is considering Projects 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 be forgone? Note that under certain conditions choosing projects on the basis of the IRR will not cause any value to be lost because the one with the higher IRR will also have the higher NPV, i.e., no conflict will exist.
A) -$1.44
B) -$1.30
C) -$1.17
D) $0.00

Question

Moerdyk & Co. is considering Projects 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 be forgone? Note that under certain conditions choosing projects on the basis of the IRR will not cause any value to be lost because the one with the higher IRR will also have the higher NPV, i.e., no conflict will exist. 
A) -$1.44 
B) -$1.30 
C) -$1.17 
D) $0.00

Quizplus · Accepted Answer

We cannot determine which project has the higher NPV without additional information, but we know that both projects have the same risk and are not repeatable, so the one with the higher IRR will also have the higher NPV. Therefore, if the decision is made by choosing the project with the higher IRR, no value will be forgone.