ID: A 13. Sexton Inc. is considering Projects S and L, whose cash flows are mutu

Question

ID: A 13. Sexton Inc. is considering Projects S and L, whose cash flows are mutual ly exclusive, equally risky, and not repeatable. If the decision is made by choosing the project shown below. These projects are 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 IR will also have the higher NPV, so no value will be lost if the IRR method is used. WACC: 12.25% 0 2 CFs-$2,050 $750 $760 CFL -$4,300 $1,500 $1,518 $1,536 4 $780 $1,554 $770 a. $48.85 b. $59.59 c. $37.61 d. $47.38 e. $48.36

Explanation / Answer

Year CF(S) CF(L) CF(S) -NPV CF(L) -NPV 0 2050 4300 -2050.0 -4300.0 1 750 1500 668.2 1336.3 2 760 1518 603.2 1204.8 3 770 1536 544.4 1086.0 4 780 1554 491.3 978.8 NPV of the projects 257.0 305.9 Difference 48.85 Answer A

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