Tesar Chemicals is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. The CEO believes the IRR is the best selection criterion, while the CFO advocates the NPV. If the decision is made by choosing the project with the higher IRR rather than the one with the higher NPV, how much, if any, value will be forgone, i.e., what's the chosen NPV versus the maximum possible NPV? Note that (1) "true value" is measured by NPV, and (2) under some conditions the choice of IRR vs. NPV will have no effect on the value gained or lost. WACC: 7.50% Year 0 1 2 3 4 CFS −$1,100 $550 $600 $100 $100 CFL−$2,700 $650 $725 $800 $1,400

Tesar Chemicals is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. The CEO believes the IRR is the best selection criterion, while the CFO advocates the NPV. If the decision is made by choosing the project with the higher IRR rather than the one with the higher NPV, how much, if any, value will be forgone, i.e., what's the chosen NPV versus the maximum possible NPV? Note that (1) "true value" is measured by NPV, and (2) under some conditions the choice of IRR vs. NPV will have no effect on the value gained or lost. WACC: 7.50% Year 0 1 2 3 4 CFS −$1,100 $550 $600 $100 $100 CFL−$2,700 $650 $725 $800 $1,400

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter12: Capital Budgeting: Decision Criteria

Section: Chapter Questions

Problem 11P

See similar textbooks

Similar questions

ND Inc. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. The CEO believes the IRR is the best selection criterion, while the CFO advocates other methods. If the decision is made by choosing the project with the higher IRR, how much, if any, value will be forgone, i.e., what's the NPV and IRR of the chosen project(s). What is the Payback period and discounted payback period?
Sexton Inc. 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, so no value will be lost if the IRR method is used. WACC: 12.75% 0 1 2 3 4 CFs -$2050 $750 $760 $770 $780 CF L -$4300 $1500 $1518 $1536 $1554 Options: $24.80 $30.25 $22.32 $28.52 $22.57
Sexton Inc. 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, so no value will be lost if the IRR method is used. WACC: 9.50% 0 1 2 3 4 CFS -$2,050 $750 $760 $770 $780 CFL -$4,300 $1,500 $1,518 $1,536 $1,554 a. $145.46 b. $226.70 c. $228.58 d. $188.91 e. $230.47
ND Inc. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. The CEO believes the IRR is the best selection criterion, while the CFO advocates other methods. If the decision is made by choosing the project with the higher IRR, how much, if any, value will be forgone, i.e., what's the Profitability index? Discuss your results of these methods and make a recommendation on the projects to the CEO about which one to go for and why?
Nast Inc. 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 MIRR rather than the one with the higher NPV, how much value will be forgone? Note that under some conditions choosing projects on the basis of the MIRR will cause $0.00 value to be lost.
Yonan Inc. 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 shorter payback, some value may be forgone. How much value will be lost in this instance? Note that under some conditions choosing projects on the basis of the shorter payback will not cause value to be lost. WACC: 10.25% 0 1 2 3 4 CFS -$800 $650 $350 $0 $0 CFL -$1,900 $550 $600 $600 $840 Please explain and show calculations.
WorldTrans 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 shorter payback, some value may be forgone. How much value will be lost in this instance? Note that under some conditions choosing projects on the basis of the shorter payback will not cause value to be lost. WACC: 14.25% 0 1 2 3 4 CFS -$950 $500 $800 $0 $0 CFL -$2,100 $400 $800 $800 $1,000 Group of answer choices $127.87 $95.90 $93.62 $116.46 $0.00
Kosovski Company is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and are not repeatable. If the decision is made by choosing the project with the higher IRR, how much value will be forgone? Note that under some conditions choosing projects on the basis of the IRR will cause $0.00 value to be lost. WACC: 10.75% 0 1 2 3 4 CFS -$775 $560 $535 CFL -$775 $315 $315 $315 $315 Please explain the process and provide calculations.
Ehrmann Data Systems is considering a project that has the following cash flow and WACC data. What is the project's MIRR? Note that a project's projected MIRR can be less than the WACC (and even negative), in which case it will be rejected.
Farmer Co. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and repeatable. Year 0 1 2 3 4 CFS -$900 $800 $600 CFL -$700 $300 $200 $400 $200 WACC: 10% Given the two projects are of different length and both are repeatable, one suggestion is to use the replacement chain approach in evaluation. If this approach is used, which project will you choose? Show the calculations and explain your decision.
Which of the following statements is false? The equivalent annual value of a project is equal to the net present value of a project held in perpetuity, divided by the required rate of return. None of the given options is false. Management may select a project with a lower net present value because qualitative factors may render the other project less attractive. The rejection of positive net present value projects by management is inconsistent with the objective of maximising shareholder wealth.
Jenny Rene, the CFO of Asor Products, Inc., has just completed an evaluation of a proposed capital expenditure for equipment that would expand the firm's manufacturing capacity. Using the traditional NPV methodology, she found the project unacceptable because: NPVtraditional=−$1,887<0 Before recommending rejection of the proposed project, she has decided to assess whether real options might be embedded in the firm's cash flows. Her evaluation uncovered three options and their probability: Option 1: Abandonment—The project could be abandoned at the end of 3 years, resulting in an addition to NPV of $1,040. Option 2: Growth—If the projected outcomes occurred, an opportunity to expand the firm's product offerings further would become available at the end of 4 years. Exercise of this option is estimated to add $2,820 to the project's NPV. Option 3: Timing—Certain phases of the proposed project could be delayed if market and competitive conditions caused the firm's…