Question

Noe Drilling 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 believes the IRR is the best selection criterion, while the CFO advocates the MIRR. If the decision is made by choosing the project with the higher IRR rather than the one with the higher MIRR, how much, if any, value will be forgone. In other words, what's the NPV of the chosen project versus the maximum possible NPV? Note that (1) "true value" is measured by NPV, and (2) under some conditions the choice of IRR vs. MIRR will have no effect on the value lost.

WACC: 7.00%

CFs Y0 -1100 Y1: 550 Y2: 600 Y3:100 Y4:100

CFl Y0 -2750 Y1: 725 Y2: 725 Y3: 800 Y4: 1400

A. $185.90

B. $197.01

C. $208.11

D. $219.22

E. $230.32

Answer 1

Year	Project 1	Project 2	PVIF @ 7%	Present value project 1	Present value project 2
0	-1100	-2750	1	(1,100.00)	(2,750.00)
1	550	725	0.934579	514.02	677.57
2	600	725	0.873439	524.06	633.24
3	100	800	0.816298	81.63	653.04
4	100	1400	0.762895	76.29	1,068.05
NPV				96.00	281.90
IRR =	12.2%	11.0%	Using excel formula
MIRR =	9.3%	9.6%	Using excel formula
Therefore vlaue lost using IRR = 281.90-96=	185.90
Answer = option A)		185.90