Question

Current Design Co. is considering two mutually exclusive, equally risky, and not repeatable projects, S and L. Their cash flows are shown below. 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? The required rate of return is 7.5%. Please show work and formula.

Year	0	1	2	3	4
CFS	−$1,100	$550	$600	$100	$100
CFL	−$2,700	$650	$725	$800	$1,400

Answer 1

rate positively ..

	Year	CFS	CFL	PVIF @ 7.5%	Present value S	Present value L
	0	($1,100)	($2,700)	1	(1,100.00)	(2,700.00)
	1	550	650	0.930233	511.63	604.65
	2	600	725	0.865333	519.20	627.37
	3	100	800	0.804961	80.50	643.97
	4	100	1,400	0.748801	74.88	1,048.32
					86.20	224.31
IRR S=		12.24%	<< using excel formula>>
IRR L=		10.71%	<< using excel formula>>
	as per IRR project S should be selected therefore value forgone =
	224.31-86.20		138.10
	ans =			138.10