Firm Is Considering Projects S and L, Whose Cash Flows

question 37

Multiple Choice

firm is considering 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.You were hired to advise the firm on the best procedure.If the wrong decision criterion is used, how much potential value would the firm lose?
WACC: 6.00%
Year 0 1 2 3 4
CFS -$1,025 $380 $380 $380 $380
CFL -$2,150 $765 $765 $765 $765

• A)$188.68
• B)$198.61
• C)$209.07
• D)$219.52
• E)$230.49

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Definitions:

Consumption Tax

A tax on the purchase of goods and services, levied at the point of consumption.

High Income

Refers to earnings that significantly exceed the average or median income level within a specific region, industry, or demographic segment.

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The taxation of the same income or financial transaction at two different levels, such as corporate profits and then again when distributed as dividends to shareholders.

Saving

Saving refers to the portion of income that is not spent on current consumption but preserved for future use, often by depositing in banks or investing.