Projects S and L, Whose Cash Flows Are Shown Below

question 90

Multiple Choice

Projects S and L, whose cash flows are shown below, are mutually exclusive, equally risky, and not repeatable.Hooper Inc.is considering which of these two projects to undertake.If the decision is made by choosing the project with the higher IRR, how much value will be forgone? Note that under certain conditions choosing projects on the basis of the IRR will not cause any value to be lost because the project with the higher IRR will also have the higher NPV, so no value will be lost if the IRR method is used. $\begin{array}{ccrrrr}\text { r: } 10.25 \%\\\text { Year } & 0 & 1 & 2 & 3 &{4} \\\hline\mathrm{CF}_{\mathrm{S}} & -\$ 2,050 & \$ 750 & \$ 760 & \$ 770 & \$ 780 \\\mathrm{CF}_{\mathrm{L}} & -\$ 4,300 & \$ 1,500 & \$ 1,518 & \$ 1,536 & \$ 1,554\end{array}$

• A) $134.79
• B) $141.89
• C) $149.36
• D) $164.29
• E) $205.36

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Definitions:

Fechner's Law

A principle in psychophysics stating that the perceived intensity of a stimulus changes proportionally to the logarithm of the actual stimulus intensity.

Thorndike's Law

A principle stating that behaviors followed by positive outcomes are more likely to be repeated, whereas behaviors followed by negative outcomes are less likely to be repeated.

Ames Room

An optical illusion room designed to manipulate perceived size and perspective, where objects appear larger or smaller than they really are.

Proximal Stimulus

The physical energy from an object that directly interacts with sensory receptors, leading to perception.