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# Comparing projects with NPV and IRR method

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A firm is considering two projects (Projects S and L), whose cash flows are shown below.

These projects are mutually exclusive, equally risky, and not repeatable.

The CEO wants to use the IRR criterion, while the CFO favors the NPV method.

What is the best procedure?

If the CEO's preferred criterion is used, how much value will the firm lose as a result of this decision?

WACC = 13.00%

Cash Flows (S)
Year 0 = -\$1,025
Year 1 = \$375
Year 2 = \$380
Year 3 = \$385
Year 4 = \$390

Cash Flows (L)
Year 0 = -\$2,150
Year 1 = \$750
Year 2 = \$759
Year 3 = \$768
Year 4 = \$777

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Solution

Present Values at Various Rates for Project S
Year Cash Flows 13 14 15 16 17 18 19
0 -1025 -1025 -1025 -1025 -1025 -1025 -1025 -1025
1 375 332 329 326 323 321 318 315
2 380 298 292 287 282 278 273 268
3 ...

#### Solution Summary

Solution describes the steps in selecting project from two projects S and L based on IRR method and NPV method. It also determines the loss to company if one criteria is used over other.

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