firm is considering Projects S and L, whose cash flows are shown below.These projects are mutually exclusive, equally risky, and not repeatable.The CEO wants to use the IRR criterion, while the CFO favors the NPV method.You were hired to advise the firm on the best procedure.If the wrong decision criterion is used, how much potential value would the firm lose?
WACC: 6.00%
Year 0 1 2 3 4
CFS -$1,025 $380 $380 $380 $380
CFL -$2,150 $765 $765 $765 $765
A)$188.68
B)$198.61
C)$209.07
D)$219.52
E)$230.49

Question

Quizplus · Accepted Answer

The NPV method is generally preferred over the IRR method, especially for mutually exclusive projects, because it directly measures the increase in value to the firm. Calculating the NPV for both projects at the given WACC and comparing them will show the potential value lost if the IRR method is incorrectly used. The difference in NPV between the two projects is $209.07.

Firm Is Considering Projects S and L, Whose Cash Flows