Question

Carolina Company is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and are not repeatable. If the decision is made by choosing the project with the higher IRR, how much value will be forgone? Note that under some conditions choosing projects on the basis of the IRR will cause $0.00 value to be lost.

r:	7.75%
Year	0	1	2	3	4
CFS	−$1,050	$675	$650
CFL	−$1,050	$360	$360	$360	$360

Answer 1

Solution:- Given in Question-

WACC (r) = 7.75%

First to calculate IRR of the Project-

Cross Over Rate = 9%.

Hence, Interest Rate is lower then Crossover rate. So Conflict Exists.

Then, We need to calculate IRR of Individual project-

IRR of CFS = 17.13%

IRR of CFL = 13.95%

Calculate NPV of the Project-

NPV of CFS = $136.31

NPV of CFL = $149.03

Value Lost if use the IRR Criterion = NPV of CFL - NPV of CFS

Value Lost if use the IRR Criterion = $149.03 - $136.31

Value Lost if use the IRR Criterion = $12.72

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