cash flows are shown below. The CEO believes the IRR is the best selection criterion, while the CFO advocam NPV. If the decision is made by choosing the project with the higher IRR rather than the one with the higher 1 much, if any, value will be forgone, i.e., what's the chosen NPV versus the maximum possible NPV? Note tha "true value" is measured by NPV, and (2) under some conditions the choice of IRR vs. NPV will have no effe value gained or lost. r: 8% Year CFS CFL 0 -$1,200 -$2,800 $700 $600 2 $600 $735 $150 $700 4 $110 $1,800

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Current Design Co. is considering two mutually exclusive, equally risky, and not repeatable projects, S and L. Their
cash flows are shown below. The CEO believes the IRR is the best selection criterion, while the CFO advocates the
NPV. If the decision is made by choosing the project with the higher IRR rather than the one with the higher NPV, how
much, if any, value will be forgone, i.e., what's the chosen NPV versus the maximum possible NPV? Note that (1)
"true value" is measured by NPV, and (2) under some conditions the choice of IRR vs. NPV will have no effect on the
value gained or lost.
r: 8%
Year
CFS
CFL
$149.21
$130.31
$121.42
$101.96
$98.10
0
-$1,200
-$2,800
$700
$600
2
$600
$735
3
$150
$700
4
$110
$1,800
Transcribed Image Text:Current Design Co. is considering two mutually exclusive, equally risky, and not repeatable projects, S and L. Their cash flows are shown below. The CEO believes the IRR is the best selection criterion, while the CFO advocates the NPV. If the decision is made by choosing the project with the higher IRR rather than the one with the higher NPV, how much, if any, value will be forgone, i.e., what's the chosen NPV versus the maximum possible NPV? Note that (1) "true value" is measured by NPV, and (2) under some conditions the choice of IRR vs. NPV will have no effect on the value gained or lost. r: 8% Year CFS CFL $149.21 $130.31 $121.42 $101.96 $98.10 0 -$1,200 -$2,800 $700 $600 2 $600 $735 3 $150 $700 4 $110 $1,800
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