Current Design Co. is considering two mutually exclusive, equally risky, and not repeatable projects, S and L. Theircash flows are shown below. The CEO believes the IRR is the best selection criterion, while the CFO advocates theNPV. If the decision is made by choosing the project with the higher IRR rather than the one with the higher NPV, howmuch, 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 thevalue gained or lost.r: 8%YearCFSCFL$149.21$130.31$121.42$101.96$98.100-$1,200-$2,800$700$6002$600$7353$150$7004$110$1,800

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Description: Current Design Co. is considering two mutually exclusive, equally risky, and not repeatable projects, S and L. Theircash flows are shown below. The CEO believes the IRR is the best selection criterion, while the CFO advocates theNPV. If the decision

IRR is rate at which the present value of cash flow is equal to the initial investment and net…

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cash flows are shown below. The CEO believes the IRR is the best selection criterion, while the CFO advocam NPV. If the decision is made by choosing the project with the higher IRR rather than the one with the higher 1 much, if any, value will be forgone, i.e., what's the chosen NPV versus the maximum possible NPV? Note tha "true value" is measured by NPV, and (2) under some conditions the choice of IRR vs. NPV will have no effe value gained or lost. r: 8% Year CFS CFL 0 -$1,200 -$2,800 $700 $600 2 $600 $735 $150 $700 4 $110 $1,800

cash flows are shown below. The CEO believes the IRR is the best selection criterion, while the CFO advocam NPV. If the decision is made by choosing the project with the higher IRR rather than the one with the higher 1 much, if any, value will be forgone, i.e., what's the chosen NPV versus the maximum possible NPV? Note tha "true value" is measured by NPV, and (2) under some conditions the choice of IRR vs. NPV will have no effe value gained or lost. r: 8% Year CFS CFL 0 -$1,200 -$2,800 $700 $600 2 $600 $735 $150 $700 4 $110 $1,800

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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I think question 3 is not answered clearly. If Project A is rejected due to negative NPV, then all positive NPVs projects should be accepted. The answer is not clear. Please correct me if I am missing something. Question 3) If the firm uses the discounted-payback rule, will it accept any negative NPV projects? Will it turn down any positive NPV projects? How do you know? Your answer is: No Due to Project A's negative NPV, it cannot cover the initial investment within its useful life. Will it turn down any positive NPV projects? It will reject projects with positive NPVs but not those with negative NPVs. If all potential cash flows are taken into account but the project still doesn't reach the designated cutoff point, the NPV can still be positive.