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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

    © BrainMass Inc. brainmass.com June 3, 2020, 9:44 pm ad1c9bdddf
    https://brainmass.com/business/capital-budgeting/comparing-projects-with-npv-and-irr-method-197009

    Solution Preview

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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.

    $2.19

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