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 You were hired to advise the firm on the best procedure. If the wrong decision criterion is used, how much potential value would the firm lose? WACC CF₁ $155.15 a Ob. $215.27 $193.93 Od $226.90. 5238 54 6.50% $1,025 32.150 5380 3765 $380 $765 $765 5380 3765

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 You were hired to advise the firm on the best procedure. If the wrong decision criterion is used, how much potential value would the firm lose? WACC CF₁ $155.15 a Ob. $215.27 $193.93 Od $226.90. 5238 54 6.50% $1,025 32.150 5380 3765 $380 $765 $765 5380 3765

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Description: 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 sethe IRR criterion, while the CFO favors the NPV method You were hired to advise th

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

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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. You were hired to advise the firm on the best procedure. If the wrong decision criterion is used, how much potential value would the firm lose? WACC: CFS CFL оо a. $239.01 b. $0.00 c. $76.55 d. $84.78 e. $325.70 10.75% 0 2 3 4 $490 $490 -$1,350 $490 $490 -$2,700 $950 $950 $950 $950
firm is considering Projects S and L, whose cash flows are shown below. These projects are matually exclusive, equally ricky, and not repeatable. The CEO wants to use the IRR erterion, while the CFO favor the NPV method. You wer ired to advise the firm on the best procedure. If the wrong decision criterion is used, how much potential value would the firm lose? NACC CFS CFL Ⓒ422001 Ob121617 0 1440 O 4318224 O18647 0 $1.025 $2.150 1 5380 $765 $75 2 $380 3 $380 $765 4 1380 5765
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: 8% Year CFS CFL O $33.32 O $29.07 O $26.95 O $23.51 O $21.19 0 -$1,500 -$2,200 1 $300 $400 2 $400 $700 3 $700 $900 4 $800 $1,100
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?
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?
Dupont 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, the value will be forgone, L.e, what's the chosen NPV versus the maximum possible NPVn 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 4 CFS -$1,500 $550 $600 $100 $200 CFL $3,000 $650 $725 $800 $1.600
Current Design Co. is considering two mutually exclusive, equally risky, and not repeatable projects, S and L. Their cash flows are shown below. 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. r: 8% Year CFS CFL $149.21 $130.31 $121.42 $101.96 $98.10 0 -$1,200 -$2,800 $700 $600 2 $600 $735 3 $150 $700 4 $110 $1,800
1) What is the company's WACC? 2) Should the company take the projects? Assume that the projects have the same risk as an average project for your firm. 3) If one project is depended on the other in a way that the company can only take both projects, should it take it?
Noe Drilling 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 the MIRR. If the decision is made by choosing the project with the higher IRR rather than the one with the higher MIRR, how much, if any, value will be forgone, i.e., what's the NPV of the chosen project versus the maximum possible NPV? Note that (1) "true value" is measured by NPV, and (2) under some conditions the choice of IRR vs. MIRR will have no effect on the value lost. WACC: 9.00% 1 2 CFS -$1,100 $550 $600 $100 $100 CFL -$2,750 $725 $725 $800 $1,400 O a. $73.38 O b. $96.55 O c. $79.56 O d. $0.00 e. $78.01
Tesar Chemicals is considering Projects S and L, whose cash flows are shown below. These projects are mutuallyexclusive, equally risky, and not repeatable. The CEO believes the IRR is the best selection criterion, while the CFOadvocates the NPV. If the decision is made by choosing the project with the higher IRR rather than the one with thehigher 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 noeffect on the value gained or lost.WACC: 7.50%Year 0 1 2 3 4CFS −$1,100 $550 $600 $100 $100CFL−$2,700 $650 $725 $800 $1,400
For each of the four questions below, identify whether the statement made in each question is correct or not and provide explanations. (b) When it comes to determining whether to take a project, the firm needs to calculate the NPV and assess the risk of it. For a highly leveraged firm, if the NPV is negative and the project is very risky, taking it is not beneficial for the firm. More specifically, the equity and debt holders will lose money because the overall firm value is highly likely decreased by that NPV.
“The stand-alone risk of an individual corporate project may be quite high, but viewed in the context of its effect on stockholders’ risk, the project’s true risk may be much lower." How does the correlation between returns on a project and returns on the firm’s other assets affect the project’s risk?