Tesar Chemicals is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. 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. WACC: 8% Year 0 1234 CFS -$1,500 $300 $400 $700 $800 CFL -$2,200 $400 $700 $900 $1,100 $33.32 $29.07 $26.95 $23.51
Tesar Chemicals is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. 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. WACC: 8% Year 0 1234 CFS -$1,500 $300 $400 $700 $800 CFL -$2,200 $400 $700 $900 $1,100 $33.32 $29.07 $26.95 $23.51
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
Section: Chapter Questions
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Transcribed Image Text:Tesar Chemicals is considering Projects S and L, whose
cash flows are shown below. These projects are
mutually exclusive, equally risky, and not repeatable.
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.
WACC: 8%
Year 0 1234
CFS -$1,500 $300 $400 $700 $800
CFL -$2,200 $400 $700 $900 $1,100
$33.32
$29.07
$26.95
$23.51
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