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
conflict will exist.
WACC: |
6.75% |
||||
0 |
1 |
2 |
3 |
4 |
|
CFS |
-$1,025 |
$650 |
$450 |
$250 |
$50 |
CFL |
-$1,025 |
$100 |
$300 |
$500 |
$700 |
a. |
$53.28 |
|
b. |
$51.51 |
|
c. |
$62.75 |
|
d. |
$59.20 |
|
e. |
$65.71 |
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