Question

Tesar Chemicals is considering Projects S and L, whose cash flows are shown below. These projects...

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: 7.00%

0 1 2 3 4

CFS -$1,100 $550 $600 $100. $100

CFL -$2,700 $650 $725 $800 $1,400

Homework Answers

Answer #1

Given that WACC is 7%.

Calculating NPV of project S, we get -1100+550/1.07+600/1.07^2+100/1.07^3+100/1.07^4= 96

Calculating NPV of project L, we get -2700+650/1.07+725/1.07^2+800/1.07^3+1400/1.07^4= 261.81

Calculating IRR of project S, Let r be the IRR. we get -1100+550/1+r+600/(1+r)^2+100/(1+r)^3+100/(1+r)^4= 0. On solving, we get r= 12.24%

Calculating IRR of project L, Let r be the IRR. we get -2700+650/1+r+725/(1+r)^2+800/(1+r)^3+1400/(1+r)^4= 0. On solving, we get r= 10.71%

So, if the decision is made by choosing the project with higher IRR, we will choose project S. Then value forgone will be NPV of project L-NPV of project S= 261.81-96= 165.81.

So, value foregone is $165.81

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Tesar Chemicals is considering Projects S and L, whose cash flows are shown below. These projects...
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...
Moerdyk & Co. is considering Projects S and L, whose cash flows are shown below. These...
Moerdyk & Co. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the higher IRR, how much value will be forgone? Note that under certain conditions choosing projects on the basis of the IRR will not cause any value to be lost because the one with the higher IRR will also have the higher NPV, i.e., no...
Tinner Corp. is considering Projects S and L, whose cash flows are shown below. These projects...
Tinner Corp. 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?   WACC:...
Noe Drilling Inc. is considering Projects S and L, whose cash flows are shown below. These...
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, i.e., what's the NPV of the chosen project versus the...
Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally...
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? WACC=8.75% Year 0 Year 1...
Quantum Water is considering Projects S and L, whose cash flows are shown below. These projects...
Quantum Water 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 method, while you believe it should be 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, i.e., what's the NPV of the chosen project versus the...
Langton Inc. is considering Projects S and L, whose cash flows are shown below. These projects...
Langton 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 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? In other words, what's the NPV of the chosen project versus...
New Wave Design Co. is considering two mutually exclusive, equally risky, and not repeatable projects, S...
New Wave 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? Note...
Nast Inc. is considering Projects S and L, whose cash flows are shown below. These projects...
Nast Inc. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the higher MIRR rather than the one with the higher NPV, how much value will be forgone? Note that under some conditions choosing projects on the basis of the MIRR will cause $0.00 value to be lost. WACC: 10.75% 0 1 2 3 4 CFS -$1,100...
Moerdyk & Co. is considering Projects S and L, whose cash flows are shown below. These...
Moerdyk & Co. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the higher IRR, how much value will be forgone? Note that under certain conditions choosing projects on the basis of the IRR will not cause any value to be lost because the one with the higher IRR will also have the higher NPV, i.e., no...