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
maximum possible NPV? Note that (1) "true value" is measured by
NPV, and (2) under some conditions the choice of IRR vs. MIRR will
have no effect on the value lost.
WACC: 9.00%
0 1 2 3 4
CFS -$1,100
$550 $600 $100 $100
CFL -$2,750
$725 $725 $800 $1,400
$73.38 |
||
$79.56 |
||
$0.00 |
||
$96.55 |
||
$78.01 |
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