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 foregone? 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. $\begin{array}{ccccc}
\text { WACC: } & 12.00 \% \
&0 & 1 & 2 & 3 & 4 \
\hline \mathrm{CFS}_{\mathrm{S}} &-\$ 1,025 & \$ 650 & \$ 450 & \$ 250 & \$ 50 \
\mathrm{CF}_{\mathrm{L}} &-\$ 1,025 & \$ 100 & \$ 300 & \$ 500 & \$ 700
\end{array}$
A)-$1.44
B)-$1.30
C)-$1.17
D)$0.00

Question

Quizplus · Accepted Answer

Given the information, to determine the value that might be foregone by choosing the project with the higher IRR, we need to calculate the NPV of both projects and compare them. However, without the specific IRRs or a direct calculation of NPVs provided in the question, we can infer that if both projects have the same initial outlay and the decision is based on IRR without a specified conflict between IRR and NPV rankings, the implication is that no value is foregone by choosing one project over the other based on IRR. This is because the premise suggests that the project with the higher IRR would also have the higher NPV under the given conditions, meaning there would be no conflict and thus no value foregone.

Moerdyk & Co A)-$144 B)-$1

Moerdyk & Co A)-$144
B)-$1