Problem:
A firm is considering two projects (Projects S and L), whose cash flows are shown below.
These projects are mutually exclusive, equally risky, and not repeatable.
The CEO wants to use the IRR criterion, while the CFO favors the NPV method.
What is the best procedure?
If the CEO's preferred criterion is used, how much value will the firm lose as a result of this decision?
WACC = 13.00%
Cash Flows (S)
Year 0 = -$1,025
Year 1 = $375
Year 2 = $380
Year 3 = $385
Year 4 = $390
Cash Flows (L)
Year 0 = -$2,150
Year 1 = $750
Year 2 = $759
Year 3 = $768
Year 4 = $777