A firm 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 the firm on the best procedure, given a WACC of 15%. If the wrong decision criterion is used, how much potential value would the firm lose? Project Year 0 Year 1 Year 2 Year 3 Year 4 S -$995 million $385 million $400 million $525 million $650 million L -$2.05 billion $705 million $835 million $950 million $1.025 billion $6.04 million O $359.08 million $46.04 million $451.15 million O $405.11 million

Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter12: Capital Budgeting: Decision Criteria
Section: Chapter Questions
Problem 11P
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A firm 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 the firm on the
best procedure, given a WACC of 15%. If the wrong decision criterion is used, how much
potential value would the firm lose?
Project
Year 0
Year 1
Year 2
Year 3
Year 4
S
-$995 million
$385 million
$400 million
$525 million
$650 million
L
-$2.05 billion
$705 million
$835 million
$950 million
$1.025 billion
$6.04 million
O $359.08 million
$46.04 million
$451.15 million
O $405.11 million
Transcribed Image Text:A firm 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 the firm on the best procedure, given a WACC of 15%. If the wrong decision criterion is used, how much potential value would the firm lose? Project Year 0 Year 1 Year 2 Year 3 Year 4 S -$995 million $385 million $400 million $525 million $650 million L -$2.05 billion $705 million $835 million $950 million $1.025 billion $6.04 million O $359.08 million $46.04 million $451.15 million O $405.11 million
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