Murray 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 wants to use the IRR criterion,
while the CFO favors the NPV method. You were hired to advise
Murray on the best procedure. If the wrong decision criterion is
used, how much potential value would Murray lose?
r. | 6.00% | ||||
Year |
0 |
1 |
2 |
3 |
4 |
CFS |
−$1,025 |
$380 |
$380 |
$380 |
$380 |
CFL |
−$2,150 |
$765 |
$765 |
$765 |
$765 |
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