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Moerdyk & Co. - Value foregone

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: 12.00%
0 1 2 3 4
CFS -$1,025 $650 $450 $250 $50
CFL -$1,025 $100 $300 $500 $700

Solution Summary

The solution explains how to determine the value forgone if a project with higher IRR is chosen.