Question 7 (1 point) Tesar Chemicals is considering Projects S and L, whose cash

Question

Question 7 (1 point) Tesar Chemicals is considering Projects S and L, whose cash exclusive, equally risky, and not repeatable. The CEO believes the IRR is the best selection criterion, while the CFO flows are shown below. These projects are mutually 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: 7.75% 0 -$1,100 S550 S600 S100 100 -$2,700 $650 $725 $800 1,400 $102.07 $118.25 $124.47 $95.84 $133.18

Explanation / Answer

The Answer is “$124,.47”

Net present Value – Project S

Net Present Value [NPV] = Present Value of cash Inflows – Initial Investment

= {[$550 x 0.928074] + [600 x 0.861321] + [100 x 0.799370] + [100 x 0.741875]} - $1,100

= $ 1,181.36 - 1,100

= $81.36

Net present Value – Project L

Net Present Value [NPV] = Present Value of cash Inflows – Initial Investment

= {[$650 x 0.928074] + [725 x 0.861321] + [800 x 0.799370] + [1400 x 0.741875]} - $1,100

= $2,905.83 – 2,700

= $205.83

“Hence, The Value will be forgone = $205.83 – 81.36 = $124.47”

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