a way to answerquiz5--8 - 650 450 250 50 CFL(1,025 100 300...

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Moerdyk & Co. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the higher IRR, how much value will be forgone? Note that under certain conditions choosing projects on the basis of the IRR will not cause any value to be lost because the one with the higher IRR will also have the higher NPV, i.e., no conflict will exist. WACC: 12.00% 0 1 2 3 4 CFS -\$1,025 \$650 \$450 \$250 \$50 CFL -\$1,025 \$100 \$300 \$500 \$700 We need to first calculate the IRR of the two projects. For this we use the IRR function Year 0 1 2 3 4 CFS (1,025)

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Unformatted text preview: 650 450 250 50 CFL (1,025) 100 300 500 700 IRR S 19.9% IRR L 15.7% So project S has a higher IRR. The value foregone depends on the NPV since the NPV is the value added. So now we calculate the NPV of the two projects using the NPV function NPV S 123.82 NPV L 104.20 Project S has a higher NPV than Project L In this case no value is foregone since based on IRR we selected the project with the higher NPV If the selected project by IRR had a lower NPV, then the difference between the NPV for the two project would be value foregone since we would have taken up the project with lower NPV and so lost the NPV of the higher project ts...
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