Question

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:	7.75%
	0	1	2	3	4
CFS	-$1,100	$550	$600	$100	$100
CFL	-$2,700	$650	$725	$800	$1,400

a. $124.47

b. $95.84

c. $102.07

d. $133.18

e. $118.25

Answer 1

		Cash flow		Present value
	year	CFS	CFL	PVIF @ 7.75%	CFS	CFL
	0	-1100	-2700	1	(1,100.00)	(2,700.00)
	1	550	650	0.928074	510.44	603.25
	2	600	725	0.861322	516.79	624.46
	3	100	800	0.799371	79.94	639.50
	4	100	1400	0.741875	74.19	1,038.63
	NPV=				81.36	205.83
IRR = CFS	12.24%
IRR = CFL	10.71%
based on IRR project CFS if selected will loss NPV by 205.83-81.36=	124.47
answer is option a)		$ 124.47