Question: 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.

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 using NPV to select projects. 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. HINT: You will need to calculate the IRR and NPV of both projects. Then calculate how much NPV you lose if you select the project based on the IRR criterion.

WACC: 9.00%

YRS - 0 - 1 - 2 - 3 - 4

CFS - $1,100 - $550 - $600 - $100 - $100

CFL - $2,750 - $725 - $725 - $800 - $1,400

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