Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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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: 3.00%

 

Year 0 1 2 3 4

 

CFS -$1,025 $380 $380 $380 $380

 

CFL -$2,150 $765 $765 $765 $765

 

Hint: NPV = PV inflows – Cost

 

IRR: Internal Rate of Return IRR is the discount rate that forces PV inflows = cost.

 

A. $272.51

 

B. $306.08

 

C. $377.26

 

D. $340.98

 

E. $240.19

 

PLEASE SHOW YOUR WORK USING BA II CALCULATOR. THANK YOU.

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