Question

ASaark Telecom 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, so no value will be lost if the IRR method is used.

WACC: 9.50% 0 1 2 3 4

CFS -$2,050 $750 $760 $770 $780

CFL -$4,300 $1,500 $1,518 $1,536 $1,554

Answer 1