Tesar Chemicals is considering Projects S and L, whose cash flows are shown below.

These projects are mutually

criterion, while the CFO advocates the NPV. If the decision is made by choosing the project with the higher IRR ra
chosen NPV versus the maximum possible NPV? Note that (1) "true value" is measured by NPV, and (2) under som

WACC: 7.50%
Year 0 1
CFS −$1,100 $550
CFL −$2,700 $650

Project L:
WACC: 7.50%
Year 0 1 2 3 4
CFL −2,700 650 725 800 1,400

CF0 = −2,700 VA
CF1 = 650 807.492969
CF2 = 725 837.828125
CF3 = 800 860
CF4 = 1400 1400

Year 0 1 2 3 4
CFS −1,100 550 600 100 100
Compounded CFs: 683.263281 693.375 107.5 100
TV: 1.584.14
MIRR: 9.55%

Year 0 1 2 3 4
CFL −$2,700 $650 $725 $800 $1,400
Compounded CFs: 807.49 837.83 860 1400
TV: 3.905.32
MIRR: 9.67%

Year 0 1 2 3 4
−$1.600 $100 $125 $700 $1300
Compute IRR
Crossover rate = 10.16%

MIRRL= 9.67 IRRL= 10.71% NPVL=

IRRS= 9.55% IRRS= 12.24% NPVS=
MIRR CHOICE: L IRR CHOICE: S NPV CHOISE:
NPV USING MIRR: $224.31
NPV USING IRR: $86.2
NPV USING NPV: $224.31

IRR vs MIRR $86.2036 - $224.3065= $ 138.10

MIRR vs NPV $0.00
IRR vs NPV $138.10
ese projects are mutually exclusive, equally risky, and not repeatable. The CEO believes the IRR is the best selection
ject 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
by NPV, and (2) under some conditions the choice of IRR vs. NPV will have no effect on the value gained or lost.

2 3 4
$600 $100 $100
$725 $800 $1,400

Project S:
WACC: 7.50%
Year 0 1 2 3 4
CFS −1,100 550 600 100 100
TV:

550 683.263281
600 693.375
100 107.5
100 100

$224.30
$ 86.20
L