Carolina Company is considering Projects S and L, whose cash flows the table below shows. These projects are mutually exclusive, equally risky, and are not repeatable. If the decision is made by choosing the higher IRR project, how much value will be forgone? Note that selecting projects based on the IRR will cause $0.00 value to be lost under some conditions. Identify also the range of discount rates in which project L will be selected. WACC: Year CFS CFL 7.75% 0 -$1,050 -$1,050 $675 $360 $650 $360 3 $360 $360

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Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
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Problem 3:
Carolina Company is considering Projects S and L, whose cash flows the table below shows. These projects are
mutually exclusive, equally risky, and are not repeatable. If the decision is made by choosing the higher IRR
project, how much value will be forgone? Note that selecting projects based on the IRR will cause $0.00 value to
be lost under some conditions. Identify also the range of discount rates in which project L will be selected.
WACC:
Year
CFS
CFL
7.75%
0
-$1,050
-$1,050
1
$675
$360
2
$650
$360
3
$360
4
$360
Transcribed Image Text:Problem 3: Carolina Company is considering Projects S and L, whose cash flows the table below shows. These projects are mutually exclusive, equally risky, and are not repeatable. If the decision is made by choosing the higher IRR project, how much value will be forgone? Note that selecting projects based on the IRR will cause $0.00 value to be lost under some conditions. Identify also the range of discount rates in which project L will be selected. WACC: Year CFS CFL 7.75% 0 -$1,050 -$1,050 1 $675 $360 2 $650 $360 3 $360 4 $360
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