How do you calculate the value forgone if IRR is used to select the project instead of NPV?
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A firm is considering 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, and you were hired to advise the firm on 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%
0 1 2 3 4
CFS -$1,025 $375 $380 $385 $390
CFL -$2,150 $750 $759 $768 $777
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Solution Summary
The solution explains how to determine the value forgone if IRR is used to select projects instead of NPV in an attached Excel file.
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