Tesar Chemicals is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. The CEO believes the IRR is the best selection criterion, while the CFO advocates the NPV. If the decision is made by choosing the project with the higher IRR rather than the one with the higher NPV, how much, if any, value will be forgone, i.e., what's the chosen NPV versus the maximum possible NPV? Note that (1) "true value" is measured by NPV, and (2) under some conditions the choice of IRR vs. NPV will have no effect on the value gained or lost.
WACC: 8%
Year
0
1
2
3
4
CFS
-$1,500
$300
$400
$700
$800
CFL
-$2,200
$400
$700
$900
$1,100
$33.32
$29.07
$26.95
$23.51
$21.19
Tesar Chemicals is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. The CEO believes the IRR is the best selection criterion, while the CFO advocates the NPV. If the decision is made by choosing the project with the higher IRR rather than the one with the higher NPV, how much, if any, value will be forgone, i.e., what's the chosen NPV versus the maximum possible NPV? Note that (1) "true value" is measured by NPV, and (2) under some conditions the choice of IRR vs. NPV will have no effect on the value gained or lost.
WACC: 8%
| Year | 0 | 1 | 2 | 3 | 4 |
| CFS | -$1,500 | $300 | $400 | $700 | $800 |
| CFL | -$2,200 | $400 | $700 | $900 | $1,100 |
| $33.32 | ||
| $29.07 | ||
| $26.95 | ||
| $23.51 | ||
| $21.19 |
Related questions
Tesar Chemicals is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. The CEO believes the IRR is the best selection criterion, while the CFO advocates the NPV. If the decision is made by choosing the project with the higher IRR rather than the one with the higher NPV, how much, if any, value will be forgone, i.e., what's the chosen NPV versus the maximum possible NPV? Note that (1) "true value" is measured by NPV, and (2) under some conditions the choice of IRR vs. NPV will have no effect on the value gained or lost.
WACC: 8%
| Year | 0 | 1 | 2 | 3 | 4 |
| CFS | -$1,500 | $300 | $400 | $700 | $800 |
| CFL | -$2,200 | $400 | $700 | $900 | $1,100 |
| $33.32 | ||
| $29.07 | ||
| $26.95 | ||
| $23.51 | ||
| $21.19 |
Nast Inc. 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 MIRR rather than the one with the higher NPV, how much value will be forgone? Note that under some conditions choosing projects on the basis of the MIRR will cause $0.00 value to be lost.
WACC: 8%
| Year | 0 | 1 | 2 | 3 | 4 |
| CFS | -$1,100 | $380 | $380 | $380 | $380 |
| CFL | -$2,200 | $730 | $730 | $730 | $730 |
| $39.45 | ||
| $42.83 | ||
| $48.56 | ||
| $53.70 | ||
| $59.24 |
