Noe Drilling Inc. 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 MIRR. If the decision is made by choosing the project with the higher IRR rather than the one with the higher MIRR, how much, if any, value would be forgone? In other words, what is the NPV of the chosen project versus the maximum possible NPV? Note that (1) “true value” is measured by NPV and (2) under some conditions the choice of IRR vs. MIRR will have no effect on value lost.
Year 0 1 2 3 4
CFS -$1,100 $550 $600 $100 $100
CFL -$2,750 $725 $725 $800 $1,400
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