Question
In: Finance
Tree Chemicals is considering Projects S and L, whose cash flows are shown below. These projects...
Tree 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. |
$95.84 |
|
| b. |
$133.18 |
|
| c. |
$118.25 |
|
| d. |
$124.47 |
|
| e. |
$102.07 |
Solutions
jeff jeffy answered 1 year agoRelated Solutions
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A company 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 other methods. If the decision is made by choosing the
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shown below. These projects are mutually exclusive, equally risky,
and not repeatable. The CEO wants to use the IRR criterion, while
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the best procedure. If the wrong decision criterion is used, how
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