Falco Co is considering Projects s and l, whose cfs are listed. These projects a

Question

Falco Co is considering Projects s and l, whose cfs are listed. These projects are mutually exclusive, equally risky, and not repeatable. Bob believes the IRR is the best selection criterion, while the Jerry advocates the NPV.

Calculate NPV of each: What is Jerry’s preference

Calculate IRR of each: what is bobs preference

What is the result if the project is chosen based on the best IRR

Jerry convinces Bob to use the npv, but wants to report his choices in rates of return. what rate of return measured is the most accurate and calculate it for the highest npv project

0 4 8.50% -$1,100 -$2,700 $550 $650 $600 $725 $100 $800 $150 $1,500

Explanation / Answer

NPV:

Project S : $ 103.17

Project L : $ 223.72

Jerry's preference : Project L

IRR :

Project S : 14%

Project L : 12 %

Bob's preference: Project S.

If project is chosen on the basis of IRR, shareholder wealth will be lower by $ 120.55.

Computation of NPV:

Project S :

Project L:

Year Cash Flows PV factor at 8.50 % Present Values 0 $ ( 1,100) 1.0000 $ ( 1,100) 1 550 0.9217 506.935 2 600 0.8495 509.700 3 100 0.7829 78.29 4 150 0.7216 108.24 NPV $ 103.17

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