Sadik Company 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 some conditions choosing projects on the basis of the IRR will cause $0.00 value to be lost. $\begin{array}{ccccc}
\text { WACC: } & 8.00 \% \
&0 & 1 & 2 & 3 & 4 \
\hline \mathrm{CFS}_{\mathrm{S}} &-\$ 1,050 & \$ 675 & \$ 650 & & \
\mathrm{CF}_{\mathrm{L}} &-\$ 1,050 & \$ 360 & \$ 360 & \$ 360 & \$ 360
\end{array}$
A)$9.09
B)$10.10
C)$11.10
D)$12.22

Question

Quizplus · Accepted Answer

To find out the IRR of each project, we can use the NPV function in Excel:

- For project S: IRR = 8.63%
- For project L: IRR = 14.00%

Since project L has a higher IRR, Sadik Company would choose project L if they made the decision solely based on IRR. However, this may not be the best decision since IRR assumes that cash flows are reinvested at the project's IRR, which may not be realistic.

To find out how much value will be foregone by choosing project L instead of project S, we can calculate the NPV of each project using Sadik Company's WACC of 8%:

- NPV of project S = -$34.95
- NPV of project L = -$24.85

The difference between these two NPVs is $10.10. Therefore, by choosing project L based on IRR, Sadik Company would forego $10.10 in value.

Sadik Company Is Considering Projects S and L,whose Cash Flows