Oil Drilling Inc. is considering Projects S and L, whose cash flows are shown below. These...

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Oil Drilling Inc. is considering Projects S and L, whose cashflows are shown below. These projects are mutually exclusive,equally risky, and not repeatable. The CEO believes the IRR is thebest selection criterion, while the CFO advocates the MIRR. If thedecision is made by choosing the project with the higher IRR ratherthan the one with the higher MIRR, how much, if any, value will beforgone. In other words, what's the NPV of the chosen projectversus the maximum possible NPV? Note that (1) "true value" ismeasured by NPV, and (2) under some conditions the choice of IRRvs. MIRR will have no effect on the value lost. WACC: 7.00%
Year     0          1       2        3           4
CFS -$1,100   $550   $600  $100   $100
CFL -$2,750   $725   $725  $800   $1,400

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4.2 Ratings (584 Votes)

The NPV of the chosen project versus the maximum possible NPV The value to be forgone is the difference between the Net Present Value of the Project S and Project L Net Present Value NPV PROJECT S See Answer

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Oil Drilling Inc. is considering Projects S and L, whose cashflows are shown below. These projects are mutually exclusive,equally risky, and not repeatable. The CEO believes the IRR is thebest selection criterion, while the CFO advocates the MIRR. If thedecision is made by choosing the project with the higher IRR ratherthan the one with the higher MIRR, how much, if any, value will beforgone. In other words, what's the NPV of the chosen projectversus the maximum possible NPV? Note that (1) "true value" ismeasured by NPV, and (2) under some conditions the choice of IRRvs. MIRR will have no effect on the value lost. WACC: 7.00%Year 0 1 2 3 4CFS -$1,100 $550 $600 $100 $100CFL -$2,750 $725 $725 $800 $1,400