Drilling Inc A)$18590
B)$197

question 94

Multiple Choice

Drilling Inc.is considering Projects S and L, whose cash flows are shown below.These projects are mutually exclusive, equally risky, and not repeatable.The CEO believes the IRR is the best selection criterion, while the CFO advocates the 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.In other words, what's the NPV of the chosen project versus the maximum possible NPV? Note that (1) "true value" is measured by NPV, and (2) under some conditions the choice of IRR vs.MIRR will have no effect on the value lost.

$$\begin{array}{l}\text { WACC: } 9.00 \%\\\begin{array} { | l | l | l | l | l | l | } \hline & 0 & 1 & 2 & 3 & 4 \\\hline \text { CFS } & - \$ 1,100 & \$ 550 & \$ 600 & \$ 100 & \$ 100 \\\hline \text { CFL } & - \$ 2,750 & \$ 725 & \$ 725 & \$ 800 & \$ 1,400 \\\hline\end{array}\end{array}$$

• A)$185.90
• B)$197.01
• C)$208.11
• D)$219.22
• E)$230.32

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Definitions:

Liquidation

The process of closing a business, selling its assets, and using the proceeds to pay off its debts.

Reorganization

A process aimed at restructuring a company's operations, structure, or finances with the goal of increasing efficiency or preparing for growth, often to avoid bankruptcy.

Order for Relief

A court order that occurs when a petition for bankruptcy is approved, protecting the petitioner from creditors and potentially leading to a debt reorganization plan.

Debtor in Possession

A debtor in possession is a status in bankruptcy proceedings where a debtor continues to control property and operate its business under the oversight of the court.