Explore BrainMass

Explore BrainMass

    IRR Criterion vs. NPV Method

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    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: 3.00%
    0 1 2 3 4
    CFS -$1,025 $375 $380 $385 $390
    CFL -$2,150 $750 $759 $768 $777

    © BrainMass Inc. brainmass.com October 10, 2019, 5:46 am ad1c9bdddf

    Solution Preview

    Please refer attached file for better clarity of functions in MS Excel.

    IRR Criteria

    Year End CFS CFL
    0 -1025 -2150
    1 375 750
    2 380 759
    3 385 768
    4 390 777
    IRR 18.06% 15.58%

    IRR is ...

    Solution Summary

    Solution describes the steps to select the appropriate project based upon IRR and NPV methods. It also calculates the value lost by the company if it prefers IRR method over NPV method. IRR is calculated by using suitable built-in function in MS Excel.