Murray Inc.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 Murray on the best procedure.If the wrong decision criterion is used, how much potential value would Murray lose? $\begin{array}{cccccc}\text { r: } 6.00 \%\
\text { Year } & 0 & 1 & 2 & 3 & 4 \
\hline\mathrm{CF}_{\mathrm{S}} & -\$ 1,025 & \$ 380 & \$ 380 & \$ 380 & \$ 380 \
\mathrm{CF}_{\mathrm{L}} & -\$ 2,150 & \$ 765 & \$ 765 & \$ 765 & \$ 765
\end{array}$
A) $188.68
B) $198.61
C) $209.07
D) $219.52
E) $230.49

Question

Quizplus · Accepted Answer

The NPV method is generally more reliable than the IRR method for mutually exclusive projects. Calculating the NPVs of both projects at a 6% discount rate, Project L has a higher NPV than Project S. The potential value lost by choosing Project S over Project L using the IRR method is the difference in their NPVs, which is $209.07.

Murray Inc A) $18868 B) $198

Murray Inc A) $18868
B) $198