Question

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: 6.75% 0 2 3 4 $650 $450 $250 $50 CFS CFL -$1,025 -$1,025 $100 $300 $500 $700 a. $59.20 O b. $62.75 O c. $51.51 O d. $65.71 O e. $53.28

Answer 1

D8 f: =SUM(D3:07) C B D E A 1 Projects 2 year 3 4 5 6 Cash flows [email protected]% Present value 이 $ (1,025.00) 1.0000 $ -1,025.00 1 $ 650.00 0.9368 $ 608.90 2 $ 450.00 0.8775 $ 394.89 3 $ 250.00 0.8220 $ 205.51 4 $ 50.00 0.7701 $ 38.50 19.86% NPV $ 222.80 7 8 IRR 9 10 Project L 11 year 12 13 14 15 16 17 IRR 18 19 20 21 22 Cash flows [email protected]% Present value 0 $ (1,025.00) 1.0000 $ -1,025.00 1 $ 100.00 0.9368 $ 93.68 2 $ 300.00 0.8775 $ 263.26 3 $ 500.00 0.8220 $ 411.02 4 $ 700.00 0.7701 $ 539.05 15.66% NPV $ 282.01 Accept Project S because of higher IRR Value to be Lost 59.20 Answer A 282.01-222.8

D8 F =SUM(D3:07) A B C D 1 Projects 2 year 3 0 [email protected]% Cash flows -1025 650 1 4. 1 5 2 450 250 50 =IRR(B3:37) 6 3 74 Present value =B3*C3 =B4*C4 =B5* C5 =B6* C6 =B7*C7 =SUM(D3:07) =C3/1.0675 =C4/1.0675 =C5/1.0675 =C6/1.0675 NPV 8 IRR 9 10 Project L 11 year Cash flows [email protected]% 12 0 - 1025 1 13 1 100 14 2 300 500 Present value =B12* C12 =B13*C13 =B14* C14 =B15*C15 =B16*C16 =SUM(D12:016) =C12/1.0675 =C13/1.0675 =C14/1.0675 C15/1.0675 NPV 15 3 16 4 700 =IRR(B12:B16) 17 IRR 18 19 20 21 22 Accept Project S because of higher IRR Value to be Lost Answer A =D17-08 282.01-222.8