Tesar Chemicals is considering Projects S and L, whose cash flows are shown below. These projects...
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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 0 1 2 3 4 CFS CFL -$1,500 $300 $400 $700 $800 -$2,200 $400 $700 $900 $1,100 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 0 1 2 3 4 CFS CFL -$1,500 $300 $400 $700 $800 -$2,200 $400 $700 $900 $1,100
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1 Calculating NPV Project S Year Cash Flow CF Discount Factor 11WACCYear Discounted Cash Flow DCF 0 ... View the full answer
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