Question

1. 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.
   

WACC= 7.50%
Year	0	1	2	3	4
Cash Flow S	-$1100	$550	$600	$100	$100
Cash Flow L	-$2700	$650	$750	$800	$1400

$138.10

$159.74

$160.31

$171.42

$182.52

Answer 1

EF YEAR pv @ 7.5% B cash flows Projects Project L -$1,100.00 $2,700.00 $550.00 $650.00 $600.00 $750.00 $100.00 $800.00 $100.00 $1,400.00 12.24% 11.02% IRR(B3:B7) IRR(C3:07) 0.9302 0.8653 0.8050 0.7488 NPV discounted cash flows Projects Project L -$1,100.00 $2,700.00 $511.63 $604.65 $519.20 $649.00 $80.50 $643.97 $74.88 $1,048.32 $86.20 $245.94 11 on accepting Project S, value lost = $159.74 [ 245.94-86.20]