Project versus the maximum possible npv

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Langton 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. In other words, 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.

r =

7.00%

 

 

 

 

Year

0

1

2

3

4

CFS

-$1,100

$550

$600

$100

$100

CFL

-$2,750

$725

$725

$800

$1,400

Reference no: EM133116772

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