Murray Inc. is considering Projects S and L, whose cash flows are shown below. The CEO wants to use the IRR criterion, while the CFO favors the NPV method. The finance officer is suggesting MIRR, while the shareholders are interested in when they can recoup their initial capital. You were hired to advise Murray on the best procedure.
r: 6.00%
Year 0 1 2 3 4
CFS −$1,025 $380 $380 $380 $380
CFL −$2,150 $765 $765 $765 $765
a) Evaluate the projects and advise using the following:
i. Payback
ii. NPV
iii. IRR
iv. MIRR
b) Comparing the IRR and NPV, if the wrong decision criterion is used, how much potential value would Murray lose?
c) Comparing IRR and 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.
d) Determine whether the two projects mutually exclusive or independent.