Question

b Multiple Choicc 11-108 Question of 25 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 will be forgone, i.e., what's 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 the value lost. WACC 9.00% $1,100 $2,750 $600 725 $100 $800$1,400 $100 CFs CFL $550 $725 a. $78.01 b. $0.00 C. $96.55 d. $79.56 e. $73.38 0--Icon Key

Answer 1

Using excel to calculate

		A	B	C	D	E
		0	1	2	3	4	IRR	Excel formula	NPV	Excel formula
1	CFs	-1100	550	600	100	100	12.24%	IRR(A1:E1)	$57.66	NPV(9%,B1:E1)+A1
2	CFl	-2750	725	725	800	1400	10.98%	(IRR(A2:E2)	$134.90	NPV(9%,B2:E2)+A2

Excess NPV = 134.90 -57.66 = 77.24 Hence closest to option 78.01

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