A 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: 8.50% CE 0 1 2 3 4 -$1.025 $380 $380 $380 $380

Essentials Of Investments
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ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
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Question 12
A 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: 8.50%
CFS
CFL
0
-$1,025 $380 $380 $380 $380
$141.55
-$2,150 $765 $765 $765 $765
$136.10
$146.99
1 2 3
$114.33
4
$115.69
Transcribed Image Text:Question 12 A 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: 8.50% CFS CFL 0 -$1,025 $380 $380 $380 $380 $141.55 -$2,150 $765 $765 $765 $765 $136.10 $146.99 1 2 3 $114.33 4 $115.69
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